Tariff Reinsurances Limited v Commissioner of Taxes (Vic) [1938] HCA 21

Tariff Reinsurances Limited v Commissioner of Taxes (Vic) [1938] HCA 21 - HCA 1938 case summary — Zoe

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O'Bryan K.C. (with him Moore), for the appellant. The question is whether the profits which the taxpayer received were " earned in or derived in or from Victoria " within the meaning of sec. 42 of the Income Tax Act 1928 of Victoria. The reinsurers insured two-thirds of the risk which the Victorian company would take, and they fixed the premium at two-thirds of the premiums received by the Viec- torian company, subject to certain deductions. The reinsurer is an English company conducting its business in England, and the - profits it makes under the contract are profits made in carrying out its ordinary business in England. There is no evidence of - agency on the part of the Victorian company, nor is there any evidence of the transaction being a joint venture. The majority judgments in the Supreme Court look at this contract either as - an agency contract or as a profit-sharing contract, but it cannot be regarded in either of such ways. The Victorian company in no way acts as agent for the English company. Income derived in or from Victoria means income arising or accruing from Vic- toria (Commissioner of Taaation v. Kirk (1); Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd. (2); Federal Com- missioner of Taxation v. Clarke (3)). The essence of the business of the reinsurer is to make contracts. The source of profit of a - particular contract is the country where it is made. The real business carried on by the appellant is the selection of risks (Grainger & - Son v. Gough (4) ). Not only is the contract made outside Victoria, but the appellant has no business premises in Victoria at all. [He - referred to Commissioner of Taxation (W.A.) v. D. & W. Murray Lid. (5).] The source of income is either the country where the contracts are habitually made or else the country where the particular contract is made (Premer Automatic Ticket Issuers Ltd. v. Federal Commis- sioner of Taxation (6) ; Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.) (7) ). The acts which are to be looked at are the acts of the taxpayer, and not the acts of somebody else.

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are that the income to be taxed is that derived in or from Victoria. Income is defined in sec. 4. The taxpayer need not do any acts in Victoria as long as he derives income in Victoria. Sec. 42 separates the transactions for the purpose of taxation. The expression " in or from" Victoria contemplates a taxpayer either in or outside Victoria. A person can "derive" income though he may not do any act which gives rise to that income (Smidth & Co. v. Greenwood (1); Siasmith v. Commissioner of Taxation (2)). There is a distinction between the English and the Victorian Acts (Commis- sioner of Taxation (N.S.W.) v. Hillsdon Watts Ltd. (3) ). One must look at the substance of the Act and at the place at which the income actually arose; that is the place with which it has the most real connection (Murray's Case (4)). It was the performance of the contract that gave rise to the profits, and the contract was com- pletely carried out in Australia. The fundamental thing that gave rise to the profits was the fact that the English company indemnified the Victorian company. The contract made in England was only an overriding contract to indemnify the Victorian company up to two-thirds of its losses. Under the Victorian Act it is not a criterion to consider where the company is carrying on its business (Maclaine & Co. v. Eccott (5) ). The fundamental thing is the performance of the contract, and that took place wholly in Victoria. [He referred to Lovell & Christmas Ltd. v. Commissioner of Taxes (6).] The Victorian company has deducted from its Victorian income the amount it has paid to the English company (Nathan v. Federal Commissioner of Taxa- tion (7) ). The substantial thing that the English company did was to make money available in case of losses. In Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (8) the central fact was that the Australian company owned certain rights and made a contract disposing of those rights. The court held that that was a pooling arrangement. The present case is a pooling arrangement also, but, if the companies had agreed to do the

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ment of claims. The primary proportion of premiums ceded to the reinsurer by the reinsured is the same as that of the risk, viz. two- ; thirds. From this the allowances are to be deducted. We listened to an elaborate discussion of the basis and true inwardness of the calculation of the deductions, the object of which was to show that the reinsurance treaty resulted in " pooling" or profit-sharing. I do not quite see what virtue there is in these expressions one way or the other. It is quite clear that under the treaty the payments to the reinsurer, whether they are called premiums or by whatever name they are described, are calculated upon a proportion to the original premiums, and it does not seem to me to matter whether it is a simple proportion or a more complicated one based upon a number of variables. The material facts of the case are simply that a company carrying on business in London and not in Victoria makes a reinsurance treaty with a company carrying on business in Victoria in the insurance of risks more or less identified with Victoria, that - the London company's remuneration is equivalent to a portion of the premiums and that the payment of the remuneration, less the London company's proportion of losses, is to be made to a bank account in Melbourne. I do not think that any amount of discussion of the facts will make more of them than this. On these facts we have to decide whether the London company derives its profit in or from Victoria. We are frequently told, on the authority of judg- ments of this court, that such a question is "a hard, practical matter of fact." This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for econo-_ mists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance. In the present case it seems to me that the London company is

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engaged in a business the profits from which arise from transactions exclusively financial in their nature. The first consideration in that business must be the company's financial capacity to shoulder the risk involved in the reinsurance, the next must be the business ability of its managers in the selection, acceptance and rejection of the various reinsurance risks proposed to it and the last must be the matters which make it ready to include the proposed reinsurance treaty under the risks accepted. In considering the source of the profit of such a business or of any transaction arising in it I do not think that the place where the event or events may or do happen upon which the company's liability depends can matter at all. The source of the income of a merine insurer carrying on business in London may be in London. wherever the ships or cargoes he insures may happen to be from moment to moment. In the case of reinsurance I fail to see why the place where the reinsured operates is any more to the point. The idea that a reinsurer is engaged in a joint operation with the reinsured does not strike me as an ordinary conception of reinsurance. They are independent contracts (Nelson v. Empress Assurance Corporation (1)), although the obligations arising under them may arise upon the same contingencies. To identify the teinsurer's premiums or other remuneration with the original premiums and to treat them as part of the insurer's source of income seems to me to overlook the entirely separate character of the two businesses out of which the transactions arise. As well might it be said that a butcher who supplies a restaurant with meat and is paid by the restaurant proprietor out of the gross returns the latter Teceives derives his income from the carrying on of the restaurant. If this method of reasoning were allowable the income of the first producer of any article should be traced through to the ultimate consumer who pays for it. And I do not attach any importance to the fact that the place of payment is Melbourne. This is only a question of banking convenience and possibly exchange. To my mind the source of the reinsurer's income is a contract constituting a reinsurance treaty made in London in the ordinary course of a business carried on in London. In my opinion the appeal should be allowed.

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reinsurer by the reassured is calculated by taking as a base the same proportion of the original premium as the proportion of risk trans- ferred and by making deductions therefrom. The ceding company has all the expense of obtaining the premiums and conducting an insurance business and accordingly could not afford to cede to the reinsurer a proportion of the premium equal to that of the risk accepted. The first deduction therefore is a percentage of the premium income, regarded no doubt as sufficient to recoup such expenses. It is a percentage varying between twenty-seven and a half and thirty-five per cent of the earned premiums according to the loss ratio of the year of account. The variation obviously tends to make it more profitable for the reassured to keep down the ratio of losses to premium income by exercising care either in the selection of risks or in the adjustment of claims or in both. The second deduction allowed from the reinsurer's proportion of the premium is a percentage of the reinsurer's " profit " from the treaty during the year of account. The " profit" is calculated according to a prescribed method based on a simple comparison between premiums and losses and between the premium reserve and estimated liability for losses at the beginning and end of the year respectively. It is an artificial "* profit." The rate allowed is ten per cent. This deduction of a percentage of the profit and the variation with loss ratio in the percentage deducted under the first head together operate to give the ceding company improved terms of reinsurance during the currency of the treaty as the risk reinsured improves. It thus puts the reassured in a position of obtaining better rates for better risks, as he might have done under the older practice of facultative reinsurance. Both the percentages are called commissions in accordance with the usual terminology of reinsurance treaties. A third deduction provided for by the present treaty is a fixed annual sum allowed on account of the costs of employing a motor engineer or engineers. The contract contains the ordinary provisions by which the reinsurance of a risk is to be upon the same terms and conditions as the original insurance and the reinsurer is bound to follow the fortunes of the reassured ; it authorizes the latter to settle all claims and requires the reinsurer

At a glance

Court

Decision date

Source

Judgment (126 paragraphs)