National Mutual Life Association of A/asia Ltd v Commissioner of Taxation

Section 111 of the Act is, and was in 1947, in the following terms: - "The assessable income of a life assurance company shall not include premiums received in respect of policies of life assurance, or considerations received in respect of annuities granted ".

The question is whether moneys received as part of the premiums for certain policies issued by the company were "premiums received in respect of policies of life assurance" within that section. The policies in question, which were of four types, will be described in detail later. They were all, especially the first three, well-known forms of policies. Indeed the first three were simply basic forms of life policies (either whole life or endowment) with additional benefits assured in the event of death by accident or of disablement.

The Commissioner of Taxation contends that in each case the contract contained in the policy document is a combination of an accident and disability insurance with a life insurance as ordinarily understood, and that the premiums payable under these policies are, therefore, not wholly "premiums received in respect of policies of life assurance". And then, as the amount of the total premium which is attributable to the element of accident and disability insurance is ascertainable, the Commissioner treats it as severable and as forming part of the appellant's assessable income, not being excluded therefrom by s. 111.

There is no definition in the Income Tax Assessment Act of "premiums" or of "policies of life assurance". Whether or not a particular transaction is denoted by some description is a question which not infrequently arises in connexion with enactments which dictate conditions governing transactions of that description, or which impose fiscal burdens such as stamp duties of different amounts upon instruments of different descriptions. In the absence of express statutory definition these questions necessarily turn upon what is the accepted connotation of the description in question - in the present case, its meaning in "common parlance among such persons as were conversant with insurance" (per Hamilton J. in Gould v. Curtis [1] ) and "as understood commonly in the business world, by insurance companies, and by other people" (per Cozens-Hardy M.R. in the same case [2] ). "Policies of life assurance" and "premiums" are expressions in common use to-day; and there are several decisions which, although given in relation to other statutes, are helpful in determining their legal meaning. There is moreover a generally accepted distinction between life insurance and accident insurance. The appellant's counsel did not dispute this. What they contended was that each of the policies in question effected not two insurances by the same instrument, but one insurance only, and that a life insurance. The presence of the special terms it was argued did not change the essential nature of the policies or render a description of them as life insurances inapt.

1. (1912) 1 K.B. 635, at p. 643. 2. (1913) 3 K.B. 84, at p. 91.

Nevertheless the solution of the present question does, in my view, depend upon ascertaining what may be regarded as the characteristics of life insurance distinguishing it from other types of insurance. I use the expression life "insurance" instead of "assurance" which is the word used in the Income Tax Assessment Act. It is conventional to use "assurance" in connexion with life contracts and "insurance" in connexion with marine, fire and other insurances; and this it has been suggested helps to point some of the essential differences between them. But it is a usage which can become pedantic, and which has had no uniform observance. The Life Insurance Act 1945-1958 is perhaps so-called because "insurance" is the word used in s. 51 (xiv.) of the Constitution; but the statute, 14 Geo. III c. 48 (Imp.), which is called the Life Assurance Act 1774 by the Short Titles Act 1896 Imp., is by its long title "An Act for regulating Insurance upon Lives "; and in s. 1 it uses both words.

Baron Parke's often-quoted description of "the contract commonly called life-assurance" in Dalby v. The India and London Life-Assurance Co. [1] was not when he gave it a comprehensive definition; it was probably not intended to be; it certainly is not today. It was merely a description of the usual form of a whole of life policy. Today several other forms of contract, equally properly called life insurances, form a great part of the business of all life offices. The generally recognized differences between the various classes of insurance arise partly from essential differences in the nature of the contracts, partly from an insistent emphasis on distinctions which are the historical result of different forms of insurance having become commercially available in different periods of history and having been, for the most part, originally made available by insurance offices conducting one class of business only. In Bunyon on Life Insurance it is said that "The contract of life insurance may be further defined to be that in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another". This description covers the three forms which, historically, life insurance has taken, and which, single or in combination, are the essence of a life insurance policy. All such policies are basically either term policies, whole of life policies or endowment policies. I put them in that order because it was in that order that they arose. A term policy is an insurance limited for a specified period, the sum insured being payable if the life insured dies within the period, but nothing being payable if he survives. The earliest life insurances were term policies and it may well be correct, as is often stated, that life insurances, as commercial transactions, first arose from insurances of the lives of captains of vessels incidental to the underwriting of marine risks. Short term life insurances by creditors on the lives of debtors were known from the late sixteenth century. Indeed the earliest life insurance contract of which any record has survived is a policy for a twelve months' term. It is set out, with an account of the litigation in the Court of Admiralty to which it gave rise, in Raynes', History of British Insurance pp. 50-52. Term policies it has been said, are nowadays very rare (Halsbury's Laws of England, 3rd ed. vol. 22, par. 539, p. 272). But they are certainly not unknown. And term insurance is one component of some more complex forms of life insurance, such as those commonly known as "family protection" and "family income" policies ( J. B. Maclean, Introduction to Life Insurance (1949), vol. 1, 46, pp. 74-76). In modern times the basic form of life insurance is the whole of life policy in which the sum insured is payable at death. Such policies are sometimes described as ordinary life policies, but the expression is better avoided because of the distinction which the Life Insurance Act 1945-1958 makes between "ordinary policies" and "industrial policies". After the extravagances of the period of the South Sea Bubble had subsided and the Life Assurance Act 1774 had prevented purely wagering insurances on lives, whole of life policies seem to have become a recognized and normal form of life insurance. Such policies may be kept afoot either by equal annual premiums until the maturity of the policy or by some modified form of premium; or more rarely they are paid up by a single premium.

1. (1854) 15 C.B. 365, at p. 387 [139 E.R. 465, at p. 474].

Endowment policies, in their original form of "pure endowments", are the exact opposite of term policies. In a term contract no payment is made unless death occurs within the stipulated term; in a pure endowment no payment is made unless the person whose life is insured survives the date when the policy matures. Endowment policies of this kind seem to have originated in the eighteenth century in schemes of insurance for the advancement in life of children. They came into common use for adults from early in the nineteenth century as a means of provision for old age. They are life insurances (Prudential Insurance Company v. Inland Revenue Commissioners [1] ). But today pure endowment policies are unusual. As a rule an endowment policy at the present day provides for payment of the sum insured at some future date (either a particular date or the attainment of some selected age) called the maturity date, or earlier death. That is now the usual meaning of the expression (Anderson v. Egan [1] ). And I use the expression endowment policy in that sense. Endowment policies of that type first came into use in 1840 (Gould v. Curtis [2] ). All forms of endowment policy clearly come within Bunyon's definition; for payment is to be made upon the happening of an event contingent upon the duration of human life - in the case of a pure endowment, survival until the maturity date - in the case of a modern endowment, survival till the maturity date or earlier death.

1. (1904) 2 K.B. 658. 2. (1905) 3 C.L.R. 269, at p. 273. 3. (1913) 3 K.B., at p. 91.

Marine, fire, burglary, personal accident, motor vehicle, and other miscellaneous insurances indemnify the insured against loss from events which may or may not occur. Life insurance on the other hand is related to a contingency, death, which must occur. It is not a risk, it is a certainty; the only uncertainty is when it will occur. This does not mean that the aim of the life policy-holder is always provision against the inevitable rather than precaution against the possible. He may wish to insure the life of a creditor for a term, or he may be concerned with the risk of death depriving dependants of support, or of the loss of income in old age; so that it has been said that a whole life policy is an insurance against dying too soon, an endowment policy an insurance against living too long. But they have a common difference from other forms of insurance; and endowment policies in various forms are to-day as properly called life insurances as are whole of life policies. (Flood v. Irish Provident Assurance Co. Ltd. [3] ; Joseph v. Law Integrity Insurance Co. Ltd. [4] ; In re National Standard Life Assurance Corporation [5] and In re Donaldson [6] , where some of the early American decisions are cited.)

1. (1912) 2 Ch. 597 n. 2. (1912) 2 Ch. 581. 3. (1918) 1 Ch. 427. 4. (1889) 23 S.A.L.R. 141.

In Gould v. Curtis [7] the policy provided for a payment of £100 on the death of the insured within fifteen years and £200 if he were alive at the end of that period. This was held to be an "insurance on life" within the meaning of the Income Tax Act 1853. Counsel for the appellant in the present case sought to use that decision as authority for the proposition that, as they put it, " the inclusion of some further contractual provision does not necessarily render a policy of life assurance anything other than a policy of life assurance". But all that the case established is that a policy of the kind now commonly called a "double endowment", is a life policy. And clearly this is so, for a double endowment - which is not to be confused with what in the United States is called a "double indemnity" - is merely a combination of a term insurance and an endowment insurance. In Gould v. Curtis [1] the policy was a term policy for £100, the term being fifteen years, combined with a pure endowment for £200, the maturity date being the expiration of fifteen years. There is in my view no analogy for the present purpose between such a combination of two well-recognized forms of life insurance in one policy and a combination of life and accident insurances.

1. (1912) 1 K.B. 635; (1913) 3 K.B. 84. 2. (1912) 1 K.B. 635; (1913) 3 K.B. 84.

One result of the difference between life insurance and accident insurance is that life policies are completely susceptible of actuarial calculation for the purposes of valuation and of determination of premium rates, the data needed being the same for all forms of life policy, namely an assumed rate of interest and appropriate mortality tables; whereas in other forms of insurance determination of probabilities would seem to have a less scientific basis, although we were informed that tables of accident experience exist.

Personal accident insurance began with railways. Many companies were formed between 1845 and 1850 to insure passengers against the consequences of railway accidents. From this beginning, personal accident insurance was extended to death or disablement resulting from other accidents, and then to various forms of insurance against incapacity from sickness. But all this occurred long after life insurance policies had become well-known distinctive instruments. And originally accident insurance was transacted by companies not engaged in other forms of insurance. It was only towards the end of the nineteenth century that companies which had been engaged in fire insurance began to undertake accident insurance (see Raynes' History of British Insurance, pp. 283-299, 373-376). The separate and late origin of accident insurance emphasized its distinctive character, and emphasizes, I think, that in a strict sense the term life policy is not appropriate for modern forms of combined insurances. Insurances against accidental death do in some ways resemble life policies; and they are within the Act of 1774 (Shilling v. Accidental Death Insurance Co. [2] ). Yet ordinary accident policies providing for payment on accidental death have been held not to be life policies for the purposes of provisions in bankruptcy and similar legislation by which life policies are protected. (See In re Corteen [1] ; In re Farley [2] ; In re Kerr [3] ; and Re Packer [4] ).

1. (1857) 2 H. & N. 42 [157 E.R. 18]; (1858) 1 F. & F. 116 [175 E.R. 651]. 2. (1941) V.L.R. 254. 3. (1933) V.L.R. 271. 4. (1943) S.A.S.R. 8. 5. (1958) 18 A.B.C. 97.

It has been suggested that the distinction between personal accident and life policies based upon the inevitability of death and the uncertainty of accident is unsound; since nearly all life policies except some deaths, for example by suicide or in an aeroplane; so that the contingency in respect of which they operate, it was suggested, is not inevitable. This is true, but the excepted risks are, in general, matters which the insured can voluntarily avoid, whereas the very purpose of an accident policy is to insure against injuries or illnesses which are not avoidable. The existence of excluded risks in life policies does not, in my view, at all impair the validity of the distinction between them and accident policies.

Accident and sickness policies also differ from most life insurances in that they are ordinarily only annual contracts. In this they are like fire and burglary and other miscellaneous policies. Even when an accident or sickness policy is renewable at the option of the insured, it differs markedly from a life policy in that it has no surrender value, each annual premium being in effect the consideration for the cover for the ensuing year.

I turn to the policies in question. They fall into four classes.

Class I. This class includes both whole of life and endowment insurances (not pure endowments) in which the policy document contains a provision as follows: - "The Annual Premium is £ due on and is payable during provided that if the Permanent Total Disability of the Life Assured as defined in the conditions enclosed hereon shall begin before the sixtieth birthday of the Life Assured payment of any Annual Premiums falling due during such disability shall be waived".

The conditions referred to are headed "Conditions Relating to Permanent Total Disability". Permanent total disability is defined as, in effect, incapacity for life for remunerative work, resulting from bodily injury or disease occurring before the age of sixty, self-inflicted injuries and disability from war service being excluded. The conditions include the following: - "The Amount Assured shall not be reduced by the Annual Premiums or instalments relating thereto of which payment is waived during Permanent Total Disability"; "Any Annual Premiums or instalments relating thereto due on or after the sixtieth birthday of the Life Assured shall be reduced by the amounts thereof charged for the Permanent Total Disability Benefit under this Policy. Upon written request of the Assured on any anniversary of the Commencing Date of this Policy and upon this Policy being delivered up for endorsement the Association will cancel the provision that payment of Annual Premiums or instalments relating thereto shall be waived during Permanent Total Disability of the Life Assured and thereafter the Annual Premium shall be reduced by the amount charged for the Permanent Total Disability Benefit".

All this shows that the company's obligation to pay the sum assured at the maturity date, the ordinary obligation under a life policy, was separate from its additional obligation in relation to permanent disablement benefits. The amount of the total premium attributable to the additional insurance was recorded and ascertainable. It was in fact only a small fraction of the total premium. The insured might relinquish the additional insurance and thereafter pay only the usual premium for an equivalent life insurance devoid of the disability undertaking. The insured could not, however, relinquish the life insurance, and by continuing to pay the amount attributable to the disability insurance keep it alone afoot. The appellant's counsel relied upon this; but in my view it does not mean that the two undertakings were not separate insurances; it means only that the company would provide disability insurance only for the purchasers of life insurance. To say: "I will sell article A for £10, and if you wish you can have article B as well for an additional £1; but I will not sell article B apart from article A", would not mean that an agreement for the sale of articles A and B together could, in any strict sense, be properly described as a contract for the sale of article A for £11. It is true that the benefit under the disability insurance was described as a waiver of the premiums; and thus, it is said, the disability insurance was merely an incident of the life insurance contract. But that I think is specious. The amount assured during disability was measured by reference to the premium payable under the combined policy, but it was not payable except to maintain that policy.

Class II. These are also either whole of life or endowment policies (not pure endowments), with, in each case, an additional sum assured in the event of death by accident, subject to certain exceptions. This kind of policy is in America called a "double indemnity policy". The relevant provisions are: - "Any Annual Premium or instalments relating thereto due on or after the sixty-fifth birthday of the Life Assured shall be reduced by the amounts thereof charged for the Accident Benefit Upon written request of the Assured on any anniversary of the Commencing Date of this Policy and upon this Policy being delivered up for endorsement the Association will terminate its agreement to pay the amount of the Accident Benefit if the Policy matures through the death of the Life Assured as the result of accident and reduce the Annual Premium by the amount charged for the Accident Benefit".

Class III. These policies are a variant of the class I kind, the additional benefit being not a waiver of premiums but a monthly payment to the insured during the permanent total disability of the life insured. Otherwise these policies are similar, in all material respects, to those in class I.

Policies of each of these three classes are well-known. They have been commonly issued in America since 1910. What I have called the additional benefits in such policies are in the Life Assurance Act 1945-1958 called the "continuous disability benefits". (See Maclean, Introduction to Life Insurance (1949) vol. 1, pp. 216-219; Magee, Life Insurance (1942) pp. 192-199; Pitman, Dictionary of Life Assurance (1930), titles "Combined Life, Accident and Disease Policies", and "Incapacitation Benefit Policies".)

Class IV. This kind of policy is no longer issued by the company; but in the relevant period premium income was received by the company under policies of this type issued in connexion with superannuation schemes. A policy of this kind provided for the payment of the sum insured by the policy to the trustees of a superannuation fund, if before the date stated in the policy the person whose life was insured should die or become totally disabled while a member of the fund. Such a policy is, in effect, a term policy in which the sum insured is payable on the death of an employee before a stated date or his earlier disablement. The premiums charged for such policies were quoted by the appellant company as a single sum and so expressed in the policy. The only way in which in policies of this class the premium could be dissected into two amounts, attributable to the death and disablement insurances respectively, would be by seeing what premium would be charged for a similar term policy which did not provide for any payment upon disablement. In practice such a premium would have been five per cent less than that payable for a corresponding policy of the class IV type. And this is the basis of the Commissioner's claim in respect of these policies.

The appellant placed some reliance upon a Scottish case, General Accident Assurance Corporation Ltd. v. Inland Revenue Commissioners [1] . The question there was whether a policy, admittedly chargeable to stamp duty as an accident policy, was also chargeable as a life insurance, which under the Act was defined as a policy "upon an event or contingency relating to or depending upon any life or lives except a policy of insurance against accident". It was in substance an accident and sickness policy containing a stipulation for the return to the insured or his representative of one-half of all the premiums paid under the policy when the insured reached the age of sixty-five or on his earlier death, provided that no claim had previously been made in respect of sickness etc., under the policy. This clause it was said was separately chargeable as a life policy. It was held, however, that it 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. I do not think that much assistance is really to be got from this or any of the many cases in which, for the purposes of stamp duty on instruments, it was necessary to decide whether or not a single instrument has more than one character because it embodied more than one transaction: see N.R.M.A. Insurance Ltd. v. Commissioner of Stamp Duties [1] and Halsbury's Laws of England, 2nd ed. vol. 28 pp. 441-446.

1. (1906) 8 S.C. 477. 2. (1956) S.R. (N.S.W.) 314; 73 W.N. 390.

Turning now to the construction of s. 111 of the Income Tax Assessment Act and its application to these contracts: -

A document which evidences an insurance contract is a policy of insurance. The word "policy" is an old one in this context (see 43 Eliz. c. 12). But the Income Tax Assessment Act is not concerned with instruments, as, for example, is an Act imposing stamp duty. The sections in question are concerned with the income of an insurance company; and, in my view, the Act, when it speaks of "premiums received in respect of policies of life assurance", is not referring to the instrument recording a contract but to the contractual obligations themselves (cf. Re Norwich Equitable Fire Assurance Society [2] ). The total of moneys paid to keep a combined policy afoot is not, I consider, properly described as a premium in respect of a policy of life insurance. If the premium paid in consideration of a combined policy were not severable and apportionable, then in my view, the result of s. 111 might well be, not that no part of the total premium should be included in the assessable income, but that all of it should be. The Commissioner does not contend that this is so. His attitude - and in my view it is correct - is that the total premium is here divisible and apportionable, and that only so much as is the true actuarially established premium for the life insurance element is within s. 111.

A consideration of related sections of the Act reinforces this conclusion. Sections 110-116 form Div. 8 of Pt. III of the Act, under the heading "Life Assurance Companies". These sections provide for the way in which the profits of a life company, ascertained in accordance with actuarial principles, are to be regarded for income tax purposes. The very nature of life insurance prevents the annual ascertainment of the profits of a life business by the simple process of setting against the total amount of receipts in any year all the outgoings of that year. In fire insurance, or any form of insurance business in which contracts are made for one year only, this method can be followed, but the determination of the profits of a life insurance business for any year involves an actuarial valuation for the ascertainment of the surplus, if any, in the insurance fund beyond the amount of the actuarially calculated liabilities of the fund at the commencement and at the close of the period. This special character of a life insurance business was recognized in Northern Assurance Co. v. Russell [1] . Sections 110-116 reflect this. Read in conjunction with other provisions of the Act, they provide a code for the assessment of tax payable by life companies. And they displace the distinction which, because of the decision in New York Life Co. v. Styles [2] exists in the United Kingdom between mutual societies and other life offices in relation to tax (see Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [3] ). Section 111 had forerunners in different forms to which Dr. Coppel has referred. But in my view the different forms of those enactments do not control the meaning of s. 111, which is to be construed in its present form and in its context in 1947. It operates negatively to exclude premium income as such from the computation. The other sections of the group indicate positively the way in which the alternative basis of computation, namely by actuarial valuation, is to be applied. The whole group of sections is concerned with life insurance business as ordinarily understood, that is, with insurance policies to which the ordinary processes of actuarial valuation can be applied by the use of an assumed rate of interest and a rate of mortality. In reply to Mr. Lush's argument that this was so, Mr. Aickin argued that s. 111 was not only independent of s. 110 historically, but also that the interpretation of s. 111 was not to be affected or controlled by s. 110. He pointed out that, in any valuation of the liabilities of an insurance company, annuity obligations, especially contracts for deferred annuities, would have to be included; and he said that since s. 110 did not refer expressly to annuity contracts they must be comprehended there under the words "policies in force". He then pointed to the different wording of s. 111: "policies of life assurance or considerations received in respect of annuities granted". Contracts for annuities take a great variety of forms; and, as is well-known, contracts for annuities form part of the business of life insurance companies. Many of these contracts are for immediate life annuities, and these admit of actuarial calculation on the basis of mortality experience. Annuity contracts are very commonly called policies. For example "an instrument securing the grant of an annuity upon a term dependent upon human life" is a "life policy" for the purposes of the Life Insurance Act 1945-1958 (s. 4). And in the forms in the first and second schedules to that Act annuities are shown as one category of policy. Moreover the word "premium" is there used for the consideration paid or payable for annuities. For example in form A in the first schedule "single premiums" and "other premiums" appear under the heading "consideration for annuities granted". It seems to me, therefore, that the words "consideration in respect of annuities granted" in s. 111 probably refer to the purchase price received for immediate annuities. These are properly described as "granted", and for them the word "consideration" may be more appropriate than "premium", which, however, is quite appropriate in the case of a deferred annuity, especially one being purchased by annual payments. But whether this be right or not, I think these verbal distinctions between s. 110 and s. 111 cannot be stretched to mean that the policies of life insurance to which the latter section relates are something different from the policies referred to in the former.

1. (1889) 2 Tax. Cas. 571, at pp. 577, 578. 2. (1889) 14 App. Cas. 381. 3. (1946) 73 C.L.R. 604.

Under the Life Insurance Act 1945-1958, additional benefits such as those in question would fall within the definition of life policy in that Act; but only because that definition refers to life policies "either with or without provision for a benefit under a continuous disability insurance contract". We were informed, and indeed that Act indicates, that, in making the valuations which it requires, such continuous disability benefits have to be valued separately from the true life insurance element of the policy, the total premium being dissected, just as the Taxation Commissioner dissects it here. This must necessarily be done because the ordinary processes of valuation by normal mortality tables are not applicable to the continuous disability benefit. There is thus no disharmony between the Income Tax Assessment Act provisions, as I construe them, and the concepts of life insurance in the Life Insurance Act.

Finally, it is worth noticing that when in 1950 s. 82H was introduced into the Income Tax Assessment Act, so as to make certain premiums paid by a taxpayer concessional deductions, the words used were "premiums or sums - (i) for insurance on the life of, or against sickness of, or against personal injury or accident to, the taxpayer or his spouse or child; or (ii) for a deferred annuity or other like provision for his spouse or child ".

In my opinion the appellant's contention fails and the first question in the case stated should be answered "No".