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Australian Insurance Association v. Federal Commissioner of Taxation.

Judges:
Sheppard J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 31 October 1979.

Sheppard J.: These are three appeals by a taxpayer in respect of assessments of income tax issued by the Commissioner in respect of the years of income ending 30 June 1976, 1977 and 1978. The three appeals were heard together by consent and precisely the same matters arise for determination in each. The appellant is a company limited by guarantee, incorporated on 13 May 1968 pursuant to the provisions of the Companies Act 1961 (N.S.W.). Its objects are contained in cl. 3 of its Memorandum and include the following:

``(a) To promote and foster the Australian insurance and/or assurance industry and Australian Insurance and/or Assurance Companies both in the Commonwealth of Australia and overseas in all fields whether national, commercial, industrial, sociological or otherwise.

(b) To encourage joint action by persons and companies engaged in the insurance and/or assurance industry in matters affecting the industry and to promote discussion and co-operation in relation

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thereto and to take action to protect and generally to watch over the interests of companies engaged in the industry and particularly of all Australian companies.

(c) To give the government whether of the Commonwealth of Australia or of any State or any committee or member of any legislative or other public body or authority opportunities and facilities for conferring with and ascertaining the views of companies engaged in the insurance and/or assurance industry as regards matters affecting that industry either directly or indirectly.

(d) To provide upon request a service to members of the public by giving information of a general nature about insurance and/or assurance covers and the types of policies available and the risks which may be covered in each of the branches of the industry provided that any such information shall not be in the nature of advice as to insurance and/or assurance with regard to any specific company or companies.

(e) To diffuse among members information on all matters affecting the insurance and/or assurance industry particularly from the point of view of Australian companies engaged in that industry and to print, publish, issue and circulate such papers, periodicals, books, circulars, and other literary undertakings as may seem conducive thereto.

(f) To improve the technical and general knowledge of persons engaged in the insurance and/or assurance industry or in any profession or industry allied to or connected therewith and to provide for the delivery of lectures and the holding of classes and to test by examination or otherwise the competence of such persons and to award certificates provided that every certificate on the face of it shall show that it is merely a certificate granted in an examination by the Association or upon other qualifications prescribed by the Articles of Association for the time being in force and that it does not take effect under any Statute or public power.

(g) To institute and establish grants, scholarships, rewards and other benefactions provided that no member of the Association shall receive any grant, scholarship, reward or other benefaction which the Association shall have contributed to or provided from its income or property except as a successful competitor for such grant, scholarship, reward or other benefaction and which under the regulations affecting the competition may be awarded to it.''

In the years in question the appellant has derived income from investments. It is that income which the Commissioner has sought to bring to tax by the issue of the assessments which are in question. The appellant claims that it is not liable for income tax because the income which it has earnt is exempt by reason of the operation of the provisions of sec. 23(h) of the Income Tax Assessment Act 1936. That section provides:

``The following income shall be exempt from income tax: -

  • ...
  • (h) the income of a society or association not carried on for the purposes of profit or gain to the individual members thereof, established for the purpose of promoting the development of aviation or of the agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia or Papua New Guinea;
  • ...''

The appellant contends that it is a society or association not carried on for the purposes of profit or gain to the individual members thereof and that it was established for the purpose of promoting an industrial resource of Australia. Its primary submission was that that resource was the Australian insurance industry. Alternatively, it submitted that, by reason of the insurance know-how and expertise which it fostered and which was made available to Australian industry (not the insurance industry) generally, it could properly be said to have been established to promote an industrial resource of Australia.

The members of the association are what may be called the majority of the truly Australian general insurance companies carrying on business in Australia. By that I mean that the insurance companies who are members of the appellant carry on a general insurance business and have in the main

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Australian shareholders or are mutual insurance companies whose policy holders are, for the most part, Australian residents.

The appellant relied upon the evidence of Mr. I.J. Frew who is its secretary and public officer. He swore an affidavit. He gave oral evidence in which he elaborated upon the matters dealt with therein and he was cross-examined. I accept Mr. Frew's account of the appellant's activities as accurate.

It is not easy to summarise shortly the evidence he gave. I propose to refer in terms to some of his evidence and then to say, in a summary way, what I consider the effect of it to be. Paragraph 11 of his affidavit is as follows:

``Since its incorporation, the activities of the Appellant have embraced the following: -

  • Providing a unified voice for Australian-owned and controlled companies in the operation of the Australian general insurance market.
  • Providing effective liaison with Government, Federal and States, concerning issues of direct relevance to development of the Australian Industry. This has included consultation in specialist aspects of the industry, i.e. reinsurance, Government Insurance Office liaison, information on overseas practices, issues effecting establishment and development of Australian-owned companies, operational structures of the insurance market.
  • Consultation with Federal Government on industry development and legislation. This included detailed presentations in respect of possible insolvencies in the industry.
  • Presentation on behalf of the Australian-owned industry to the Australian Senate Select Committee on foreign ownership and control - 1972.
  • Submission to Federal Government Inquiry - National Rehabilitation and Compensation Scheme - 1972.
  • Initiation of discussion leading on to ultimate representation by the industry overall on a possible natural disaster scheme.
  • Adoption of a voluntary solvency test.
  • Formation of Syndicates designed to help establishment of a commercial hull insurance market and develop the fire underwriting sector.
  • Submission to the Australian Tax Inquiry 1974.''

Tendered in the course of Mr. Frew's oral evidence were copies of submissions made by the appellant to the Australian Government Committee on the National Scheme of Rehabilitation and Compensation, to the Commonwealth of Australia Taxation Review Committee and to the Select Committee on Foreign Ownership and Control. Tendered also were the appellant's annual reports for the years ending 30 June 1976, 1977 and 1978, which contained accounts of its activities for those years. I also refer to evidence given by Mr. Frew in which he said that the preservation of insurance premiums paid within Australia, with the result that fewer premiums went to overseas companies, whether directly or in the form of re-insurance premiums, was a very significant ``issue to us and to the country as a whole''.

Another matter with which he dealt is mentioned in the following evidence:

``In addition to that it is necessary for us to generate, to develop the underwriting skills based in Australia which enable us to do that (that is to keep insurance business, and thus premiums, in Australia); and the generation of those skills among members of our companies and among others in Australia are part of the broader outflowings or results of the Association's work and we believe this is tending to achieve the development of our resources.

May I illustrate that in a particular way? In the North West Shelf project, for example, the underwriting skills which are required for this highly complex operation will be worldwide. But it is our attempt that a lot of those underwriting skills might be based and brought to Australia in a growing degree, and this is gradually being achieved.

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Q. But often it is not so much a question of the skill or the ability of an Australian insurance company to provide insurance but simply that the extent of the risk is so great that it cannot safely leave the risk inside Australia. It has got to be placed outside, at least to a degree? A. To a degree, and there is always a question of degree which is the vital thing, that more and more, and a growing margin all the time, can be retained in Australia. This is growth as far as the industry is concerned, we believe the development of our resources. This point will be illustrated in a smaller but much neater way in the explanation of our hull syndicate operation which has been referred to or which will be referred to in the later evidence that we are presenting here. We have a small syndicate which underwrites hulls and that has been growing since 1974 to increase its capacity by in the vicinity of $100,000, $200,000 net retained business per year, and this has been quite a helpful thing in retaining such business. There are two things which have been necessary; the skills to underwrite it and the retention of the financial resources.''

Upon the basis of Mr. Frew's evidence, I conclude that many of the activities of the appellant have been concerned with the protection and furtherance, directly and indirectly, of the interests and businesses of its members, not in the sense of protecting or furthering the interests of any one of them but rather in the sense of protecting or furthering the interests of Australian insurance companies generally and as a whole. The aim has been to keep insurance business in Australia, to direct it towards Australian companies and to keep as much premium income here as possible, rather than have it disbursed overseas. None of these objectives can be directly achieved. A wide range of activities is involved, some having more relevance to the purposes I have mentioned than others. A separate objective has been to foster underwriting skills in Australia. The appellant's aim is to create in Australia a pool of underwriting skill and knowledge so that insurance companies carrying on business here, whether they be Australian or overseas companies, will have access to sufficient numbers of expert personnel whom they will be prepared to employ, thus avoiding or reducing the need to post overseas people to Australia or to bring overseas people to Australia or to bring overseas people here for the purpose of underwriting the risks involved in particular projects, for example, the North West Shelf project mentioned in Mr. Frew's evidence.

The trend of the cross-examination by counsel for the Commissioner was that the appellant was established and carried on its activities for the more selfish interests of its members. It was established, so it was suggested, in order to achieve a building up of the businesses of its members at the expense of the business of overseas companies. This led to a submission that the appellant was not so much established for the purpose of promoting any resource of Australia but for the purpose of preserving and increasing the businesses of its members. Counsel for the Commissioner also submitted that it was not correct that any prime purpose of the appellant was to nurture and foster underwriting skill on the part of insurance staffs in Australia.

In my opinion the difference between the parties in the way that each views the evidence is one of emphasis. The very nature of the appellant's undertaking is such that it must further the more selfish interests of its members by engaging in the various activities which it does. But that, in my opinion, is only a consequence of what it does and in any event itself leads to a situation pursuant to which the appellant's endeavours do have the overall effect of promoting the protection and furtherance of Australian insurance business.

Of course, the critical question is whether, within the meaning of sec. 23(h) of the Act, the appellant was established for the purpose of promoting a resource of Australia - I omit, for the time being, the word ``industrial''. The objects which I have earlier quoted from cl. (1) of the appellant's Memorandum satisfy me that it was. But that would not be enough to bring the appellant within the section unless its activities were seen to be amongst those which it was established to pursue. In my opinion the evidence does show that the appellant is, and was during the relevant years of income, pursuing activities of the kinds specified in the various objects of its Memorandum which I have set out.

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I am further satisfied that the undertakings of the Australian insurance companies, viewed as a whole, are a resource of Australia. I use the word ``undertakings'' in the broadest sense. I include within it not only the businesses of the various companies but also their assets and the knowledge and skill of their staffs. I find also that one of the purposes for which the appellant was established was to foster generally underwriting skills on the part of Australians, whether they be employed in Australia by Australian or overseas companies. That is a matter referred to in para. (f) of the objects. It is plainly an important objective of the appellant; and insofar as underwriting skills are fostered in this way, so, in my opinion, a resource of Australia is promoted.

It was the submission of the Commissioner that although some part of the appellant's activities might include the promotion of a resource of Australia - Australian insurance business and underwriting skill and know-how - that was not the dominant or main purpose of its establishments or operations. There was not agreement between counsel as to whether that circumstance, if it were so, was critical, counsel for the appellant contending that it was enough if one of the purposes of the appellant's establishment was the promotion of an Australian resource, albeit that that was not the main purpose of its existence. In the view that I take of the matter, the resolution of the question raised by the competing submissions is important in relation to the appellant's alternative submission, but of no importance in relation to its primary submission. That is because the evidence satisfies me that the prime purpose of the establishment of the appellant was to promote the protection and furtherance of the businesses of Australian insurance companies. The undertakings of those businesses I consider to be resources of Australia. The appellant was also established to promote another Australian resource, Australian underwriting skills and knowledge. I do not consider that it was established primarily to promote that resource. But for the purposes of the appellant's primary submission, all the Australian resources it was established to promote may be looked at in combination. The dominant purpose for which the appellant was established was to promote the Australian resources which I have mentioned.

It follows that the appellant will be entitled to succeed on its primary submission if the resources it was established to promote are ``industrial resources'' within the meaning of the section. I turn to consider that matter. In a number of documents which were tendered the expressions ``insurance industry'' and ``Australian insurance industry'' are used. Those expressions are also used in some of the paragraphs which I have quoted from cl. 1 of the appellant's Memorandum of Association. It may be that the draftsman of the Memorandum had an eye for the provisions of sec. 23(h) of the Act here in question. But the matter is one of substance, not of form. It is a question of deciding what the words ``industrial resources of Australia'' in the section mean. The fact that in common parlance or in the appellant's document of incorporation the expression ``insurance industry'' may be used, does not provide any guide as to what the meaning of the expression is when used in the section.

Strong reliance was placed by counsel for the Commissioner on what was said by Windeyer J. in
The Queen v. The Commonwealth Conciliation and Arbitration Commission; Ex parte The Association of Professional Engineers, Australia (1962) 107 C.L.R. 208. His Honour said (at p. 267):

``Expressions such as `the banking industry' or `the insurance industry' are not really a proper use of words; and the use of such expressions in industrial law does not justify propositions such as `banking is an industry' to be used as major premises in arguments. In the course of the argument in this case the Chief Justice said that the ordinary meaning of terms has shifted over the years and asked: `is it not quite inappropriate to speak of the banking industry?' With this I respectfully agree. We must not, in interpreting the Constitution, restrict the denotation of its terms to the things they denoted in 1900. The denotation of words becomes enlarged as new things falling within their connotations come into existence or

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become known. But in the interpretation of the Constitution the connotation or connotations of its words should remain constant. We are not to give words a meaning different from any meaning which they could have borne in 1900. Law is to be accommodated to changing facts. It is not to be changed as language changes. The word `industry' has suffered, as words do, by the attrition of usage and from snobbery and the desire for genteelism, so that now we hear for example of the hire-purchase industry - `trade' or `business' would not suffice - the racing industry, and even the betting industry. Correctly used the word `industry', however, still has a variety of meanings. Sometimes it is used in association with, and without any sure distinction from, `trade' and `commerce'. In one sense it denotes activities other than agriculture; in another it comprehends agriculture. Sometimes it is used to denote private enterprises carried on by private capital for profit; but often it includes `nationalized' industries. It ordinarily carries a concept of work directly concerned with the production, maintenance, repair, distribution or transport of tangible things and also with the provision of intangible things such as gas and electricity. It is this sense that I think is involved in the expression `industrial dispute' in para. (xxxv).''

I do not find what his Honour has said decisive of the present problem. It is a question of ascertaining what the expression ``industrial resources'' was intended to mean in the section which is under consideration. As his Honour said, it is a correct use of the word ``industrial'' to use it in association with, and without any clear distinction from, ``trade'' and ``commerce''. Thus the fact that it may not be an appropriate use of language to refer to the insurance industry does not of itself mean that the appellant was not established to promote, within the meaning of the provision in question, an industrial resource of Australia.

An analysis of the section discloses that the first group of resources dealt with (omitting from consideration that of aviation) are all of primary industry, namely, agricultural, pastoral, horticultural and viticultural. Next are the manufacturing resources. It would seem to have been the draftsman's intention to distinguish between such resources and the final category of industrial resources. There is a question as to whether there are two separate and distinct categories, or whether there may not be some overlapping between the two. Whether that be so or not, one must reach a conclusion as to what type of resources were intended to be referred to as industrial resources as opposed to those which were embraced by the expression ``manufacturing resources''. If, as I think is the case, plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity, are ``manufacturing resources'', one has to ask oneself what kinds of other resources there are which are industrial as distinct from manufacturing. As a matter of the ordinary use of language, the resources I have mentioned could properly be described as industrial resources as well as manufacturing resources. But I do not think that the two expressions would have been used unless the draftsman had intended that the expression ``industrial resource'' would include a wider and different range of resources from those which are manufacturing resources.

In the submission of counsel for the Commissioner, the words ``industrial resources'' were inserted to cover such resources as those of the building industry or the mining or quarrying industries. The word ``industrial'' was thus said to have been used in its traditional or conventional sense.

Having reflected on the matter, I have reached the conclusion that the submission made by counsel for the Commissioner should be accepted. There is a degree of specificity in the words used in the section. It refers to aviation, then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of various expressions does not suggest that the draftsman intended to give to the word ``industrial'' any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word ``manufacturing'' or to be as specific in relation to the primary industry resources which are mentioned. Certainly ``manufacturing'' resources would have been

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within ``industrial'' resources and a more general word to describe the resources of primary industry could have been used. It is to be observed that there is no reference in the provision to the dairying resources of Australia although, I suppose, there may be a question as to whether they do not fall within pastoral resources: cf. the original definition of ``industry'' in the Commonwealth Conciliation and Arbitration Act 1904.

Even if the word ``industrial'' had been used alone (that is, without the word ``manufacturing'') I think there would have been a question as to whether commercial or business resources were included. In a provision which refers specifically to agricultural and pastoral resources it might have been expected that the draftsman, if he had intended the expression to be as wide as is contended for by the appellant, would have used a further additional word with a well-known meaning to make his intention clear. The fact that he has not leads to the conclusion that he did not intend to include resources of the kind promoted by the appellant's principal activities to be within the benefit of the provision which is in question. As the Commissioner's submission demonstrates, meaning and effect can be given the words. The building, mining and quarrying industries, and the resources which these industries have, are not aptly described as manufacturing industries but they are industries in the accepted sense of the word. Industries in a similar category are the shipping and transport industries. Thus a reference to the resources of those industries as the industrial resources of Australia does not impose upon the language any strain and enables the two expressions, ``manufacturing resources'' and ``industrial resources'', to stand alongside each other and each to be given meaning and effect. For the reasons given, the appellant's first submission is rejected.

I turn to its second submission. It was that one of the purposes for which it was established was to promote an industrial resource of Australia in that it made available to industry generally underwriting skill and knowledge. I have already found that to be so, subject to the fact that that skill and knowledge is available not only to industry, but also to other sections of the community. Reliance was placed upon what was said by Isaacs and Rich JJ. in relation to the expression ``industrial disputes'' in sec. 51 (xxxv) of the Constitution in
Australian Insurance Staffs' Federation v. Accident Underwriters' Association (1923) 33 C.L.R. 517. Their Honours said (at p. 527):

``The second contention involves the essential nature of the business of banks and insurance companies in relation to industrial operations. There can, no doubt, be found in accredited works on finance and politics, references both to banking and insurance as departments of industry. These references are certainly of some force as indicating that the expression `industrial disputes' applied to those cases is not so inapt as the respondents' argument would suggest. But we rest upon the inherent fact of the nature of the part that banking and insurance both play in the scheme of national industrial activity. They are indispensable portions of the general industrial mechanism. Without the aid of the capital and credit furnished by bankers the present system of industrial organization would collapse. They directly furnish an essential instrument of production. Insurance companies increase the productivity of capital actually employed in industry by diminishing the uncertainty of its continuance. Unexpected losses are replaced, the risk of these being transferred to the accumulated fund that the insurance business provides. Banks and insurance companies alike, though in varying circumstances, provide for industry one essential commodity - capital; and without them modern industrial operations would be impossible. They perform their services to industry in many ways, adapting their assistance to the protean needs of society. We are utterly unable to sever legally what the hard facts of life have so closely united, and, therefore, conclude that the disputes now referred to us answer the description of `industrial disputes' within the meaning of the Constitution. If that be so, it necessarily follows that they are within the statute.''

That dictum is still accepted as a statement of the law. It was referred to without

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disapproval in the
Professional Engineers' case by Dixon C.J. (107 C.L.R. 236 at p. 236) and by Windeyer J. (at p. 267). It was also referred to by Barwick C.J. in
Pitfield v. Franki (1970) 123 C.L.R. 448 at p. 458. I refer also to
The Queen v. Marshall; Ex parte Federated Clerks' Union of Australia (1975) 132 C.L.R. 595 at pp. 601, 602, 603 and 607-8.

In my opinion there are two difficulties about the appellant's second submission. The opening words of the dictum of Isaacs and Rich JJ., upon which reliance is placed, qualify what is later said by restricting it to what are termed ``industrial operations''. The dictum was not therefore intended to apply in relation to operations which could not be termed ``industrial''. Later glosses on the dictum have referred to insurance being found to be ancillary or incidental to the organised production, transportation and distribution of commodities or other forms of material wealth (per Dixon C.J. in the Professional Engineers' case, 107 C.L.R. at p. 236) and to the activities of insurance companies being ``an adjunct of industry'' (per Windeyer J. in the same case at p. 267). Much of the businesses of the insurance companies which make up the membership of the appellant are concerned with domestic (particularly household) insurance, motor vehicle insurances where the vehicles are used for private purposes or business purposes which could not be said to be industrial, marine insurance in respect of privately owned craft of various kinds not used in industry, and other types of insurance which it would be difficult to connect with industry, however widely one were to define that expression. In fairness to the appellant's submission, it may be correct, however, to take the view that that part of its activities which foster Australian underwriting skill and knowledge is concerned more with fostering that resource for the benefit of or as a service to industry (using that expression in its conventional sense) rather than for the benefit of any other section of the community. The evidence makes it difficult to come to a conclusion on that matter.

Be that as it may, there is a second problem. The submission is based upon so much of the activities of the appellant as relate to the fostering - the promotion - of underwriting skills and knowledge in persons employed by insurance companies in Australia, whether Australian owned or not. As I have already said, that is one of the purposes for which the appellant was established. But it is only one of those purposes. A more substantial purpose, on the findings I have made, was the protection and furtherance of the interests of the Australian companies making up the appellant's membership. In my opinion the Commissioner is correct in his submission that the purpose which is referred to in sec. 23(h) must be the principal or dominant purpose for which the association or society was established. There is no reason to construe the section differently from other provisions of the Act where the word ``purpose'' is used. I instance sec. 26(a). Accordingly, if one were to take the view that the entirety of one of the purposes for which the appellant was established was the promotion of an Australian industrial resource, namely, the furthering and fostering of underwriting skills and knowledge made available to the industrial community, the appellant would still not be able to show that the principal or dominant purpose for which it was established was that purpose. It was thus not, established for the purpose of promoting an industrial resource of Australia. I therefore reject the appellant's second submission.

It follows that each of the appeals fails. I order that each appeal be dismissed. Each assessment is confirmed. I order the appellant to pay the Commissioner's costs of the appeals but on the basis of one set of costs only being allowed.


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