Case W6
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
These proceedings involve assessments against two corporate applicants, one of which is the wholly-owned subsidiary of the other. upon
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their invitation to do so I identify them as Australian Mortgage Insurance Corporation Limited (``AMIC'') and its subsidiary, Amic Investments Pty. Limited (``Investments'').2. AMIC was incorporated in 1970. As there was no suggestion that the purpose of its incorporation was public or private benevolence, I find that the object of the promoters in seeking the incorporation of AMIC, and later of its directors and shareholders in managing it, was that it should prosper and, by doing so, increase the wealth of the shareholders in AMIC. In 1981 AMIC caused two other companies to be incorporated. I am satisfied that it was the intention of AMIC that they too should prosper and, in doing so, bring increased wealth to AMIC. It was acknowledged that it was intended that one of the two subsidiaries should increase its wealth by trading in shares. There is no issue before me as to that company and no evidence whether it did so trade. It was asserted by the applicants that the other company (``Investments'') was formed ``to carry on business as a separate investment company which was not engaged in insurance business''. In the case of both AMIC and Investments increases in wealth followed. The questions for determination are whether some of the increments occasioned increases in liability to income tax.
3. AMIC principally sought to increase its wealth in two ways. One was by carrying on business as an insurer: a business which, AMIC contends, is to be distinguished from its second field of enterprise. That second field was to carry on business as an investor. The field of insurance in which AMIC engaged was that of insuring lenders on mortgage against possible loss consequent upon default by borrowers. It provided cover by two forms of policy providing respectively for commercial mortgage insurance and residential mortgage insurance. In each case the insurance offered by AMIC was by way of indemnity to mortgagees against losses arising on the exercise by them of their power of sale or foreclosure under the mortgages granted to them. To confine its risk and to increase its prospects of profitability in that undertaking AMIC reinsured. In also followed a policy of increasing its reserves with a view to ensuring its capacity to satisfy any claims which be made upon it. For many years it maintained a ``statutory deposit'' with the Insurance Commissioner even though there was doubt as to whether it had an obligation to do so. In the 1980 year its ``statutory deposit'' was refunded but, when later the Insurance Commissioner claimed that AMIC was obliged to comply with his directions, it did so. To ensure its day-to-day capacity to deal with any claims which might arise, even though there was usually a substantial interval of time and elapsed between date of claim and date of satisfaction of claim, it at all times maintained substantial sums of money at call and by way of current assets.
4. The second means whereby AMIC sought to increase its wealth, and the principal means by which it did so, was as an investor holding income-producing assets. Prior to 30 June 1979 the applicant had held a freehold interest in a block of flats but that real estate was disposed of during the year of income ended 30 June 1980 and thereafter the company held no freeholds. Apart from ``fixed assets'' in the way of furniture and equipment and motor vehicles, it invested in assets which were directly productive of income. Using the terminology of the balance sheet and accounts of AMIC, the range of investments comprised Commonwealth Government inscribed stock; semi-government loans; deposits with banks and building societies; term deposits; interests in unit trusts; debentures; mortgage loans; shares in unrelated companies (quoted on the Stock Exchange); shares in unrelated companies (not so quoted); and unsecured notes (not so quoted).
5. Over the years AMIC prospered. More often than not it derived an underwriting profit - a profit which was derived sufficiently often and in sufficiently large amounts to overall generate profit for AMIC from its insurance work. It also gained substantially from its investments in shares in that, with rare exceptions, the shares in which AMIC invested increased in value. In some instances, that increase in value came to be a realised gain in that the shares were sold. In some instances, those shares were sold within 12 months of the date of their acquisition. In that event, AMIC accepted that the profits so derived were liable to be brought to account in the determination of its taxable income by reason of sec. 26AAA of Income Tax Assessment Act 1936 (``the Act''). In other instances sec. 26AAA of the Act did not have any application to the transactions. In that event, the realised gain
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would only constitute assessable income of AMIC if the shares in question had been acquired for the dominant purpose of profit-making by sale; or if the profit had been derived in the course of carrying on a profit-making undertaking or scheme; or if the profit was a profit generated in the course of carrying on a business which involved the generation of such profits. In the case of AMIC, that business might be considered to be ``the business of insurance'' as to which the dealing in shares was but an element, although an integral element; or it might be the business of a dealer in shares. To determine whether in circumstances such as these the profit on the sale of shares not already treated as assessable income by reason of sec. 26AAA of the Act requires that the Tribunal should ``make both a wide survey and an exact scrutiny of the taxpayer's activities''Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740 cited by Gibbs J. (as he then was) in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106 at p. 116).
The AMIC issues
6. During the year of income ended 30 June 1983 and 1984 AMIC sold shares and the sales generated profits (or losses) as follows:
Code
Purchased No. Company Sale Proceeds Profit
$ $
Feb. 1981 14 C.S.R. 6.10.82 1,308 158
Oct. 1980 A34 Myer
Emporium 11.3.83 31,005 1,377
Dec. 1979 A2 ANZ Banking
Group 4.5.83 62,692 8,532
Apr. 1981 A39 Dunlop Olympic 5.5.83 30,141 4,470
July 1981 20 Huttons 7.10.82 552 (381)*
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Profit to 30.6.83 14,156
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Oct. 1980 1 Alliance Holdings 16.4.84 82,005 36,130
Oct. 1980 37 Nile Textiles 19.12.83 33,675 18,923
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Profit to 30.6.84 55,053
---------------------------------------------------------------------------
*The applicant had held 50,700 shares in Huttons from before 1 July 1981. During the year of income ended 30 June 1981 it sold 50,000 of those shares at a profit of $2,030 which was treated by it as a capital gain. That transaction is not in issue before me. During the year of income ended 30 June 1983, it sold the remaining 700 shares at a loss of $381.
7. No claim was made to deduct the loss sustained ($381) and in neither year was there any sale the profit on which was liable to assessment pursuant to sec. 26AAA of the Act. The issue for determination in relation to AMIC is whether the profits so derived in the years of income ended 30 June 1983 ($14,156) and 1984 ($55,053) constitute assessable income liable to [be] brought to account in determining the taxable income of AMIC.
8. During the year of income ended 30 June 1984 AMIC also sold the residue of its share portfolio to Investments. Some details of the shares transferred appear in para. 23 below. For the moment it suffices to note that the shares were sold at cost by AMIC although it seems most likely that their value substantially exceeded cost. It has not been suggested in these proceedings that that disposition was one which generated any assessable income in the hands of AMIC or that the share portfolio should have been considered as trading stock on hand (cf. sec. 28 and
F.C. of T. v. St Hubert's Island Pty. Ltd. (in liq.) 78 ATC 4104; (1978) 138 C.L.R. 210).
The Investments issues
9. From its incorporation, Investments commenced to acquire a portfolio of investments, including shares listed on the
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Stock Exchange. In the 1984 year it purchased from AMIC what then remained of listed shares in the investment portfolio of AMIC. The purchase was made at cost to AMIC. The issued capital of Investments was initially $10,000 (10,000 shares at $1 each). Later, issued capital was increased to $2,000,000. At all material times Investments was a wholly-owned subsidiary of AMIC. In the 1985 year all of the shares then owned by Investments were transferred back to the investment portfolio of AMIC. Having regard to what appears in the accounts of AMIC as ``amounts receivable'' from subsidiaries, it seems reasonable to assume that the share transactions of Investments were made possible through loans made to Investments by AMIC. Investments carried on no business of insurance.10. During the years of income ended 30 June 1984 and 1985 the profits generated by share sales were:
Year Ended 30 June 1984 1985
$ $
Total 117,807 247,481
Less sec. 26AAA 59,765 23,552
------- --------
$58,042 $223,929
------- --------
The issues for determination are whether the sums of $58,042 and $223,929, or either of them, constitute assessable income.
The evidence
11. The evidence presented for the applicants on these applications was that of Mr. F.J. Church, a solicitor of Sydney. The evidence was detailed in affidavits sworn and filed: the affidavits being attended by extensive schedules giving details of many features of the investments of both companies and of the underwriting business carried on by AMIC. Mr Church has been chairman of directors of AMIC since its incorporation. He has also been managing director at all material times of Milton Corporation Limited, owner of a quarter interest in AMIC. I accept his evidence that the investments made by AMIC are made under the authority of the board of directors and are the subject of regular review by that board. However, in doing so, I also find that it usually acts on the recommendations of Mr Church as to its purchases and, if and when it acts on the recommendations of others, all investments purchased or sold are subject to his approval. I accept that on no occasion has the board disagreed with any purchase or sale proposed by him. I accept that in between meetings of the board the decision whether to buy or sell is left to Mr Church. In short, I find that his assessments, judgments and decisions are dominant in the affairs of both applicants.
12. I find that he is a most astute investor, basing his decisions on his own studies of the published documents of the companies; his reading of the financial press; his discussions with colleagues from within and without the group; and his own experience. I find that, in addition to having regard to the industry in which the principal operations of the subject company are conducted; rates of earning currently, and in recent years; the relationship between operating income and operating capital; he is particularly influenced by his assessment of the management of the company. I accept the latter factor was particularly influential in at least one instance where the sale of a holding in a particular company was followed quite shortly by reinvestment in that company but only following a change of management. I find that he had a particular interest in assessing companies likely to be the target of take-over offers; that he was conscious of his astuteness in that regard; and that he sought for purchase shares which he expected might be the subject of take-over offers. As Mr Church said during his cross-examination:
``If the sales were take-overs or at the time of take-overs you would find there would have been a very big increase, a big profit over the book value... as you have noticed from my affidavits probably half of the shares are in take-overs... you will notice we made some very substantial capital profits out of take-overs.... That is a bit of a hobby of mine.''
13. I find that, when AMIC sold its remaining shares to Investments, they were all sold at cost to AMIC. I find that, when Investments later sold certain shares to AMIC in 1985, some were sold at cost to Investments and the other part sold at their value in the books of Investments: that value having previously been determined by the board when creating a revaluation reserve for the purpose of making a bonus issue. I accept that the sale from Investments to AMIC was made in order that the value of the shares could be taken into
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account by the Insurance Commissioner when assessing whether AMIC complied with certain solvency tests. I accept that, with the exception of shares sales between AMIC and Investments, the other sales can be classified as follows:- (a) sales within 12 months of acquisition;
- (b) sales where a take-over offer was made and accepted;
- (c) sales when shares were sold on market before a take-over offer was complete; and
- (d) sales on a review of suitability for continued investment.
14. I accept the evidence of Mr Church that it has never been his intention at the time of directing a sale to sell shares currently at a high price and low yield with a view to buying back at a future date at a lower price but with a better yield. I accept that on no occasion has AMIC sold shares in order to meet its obligations under any of its insurance policies and that in his thinking - which I attribute to AMIC - the investment portfolio is something which is conceptually quite distinct from the insurance activities of AMIC. It is not disputed that, in the event of underwriting losses, all of the assets of AMIC are available to meet its policy creditors. I find that there was no formalised system within AMIC and in its accounting records which purports to distinguish between the two types of activity as investor and insurer. I find that there was a period when steps were taken to formally separate the share investment transactions of AMIC from its other activities, but that was by resort to the course of establishing Investments as a separate legal entity. The result was to substitute an indirect interest in such shares through its shareholding in a subsidiary for a directly held interest in such shares.
15. An indication of the substantial growth in value of AMIC can be seen from the following figures taken from the published accounts of that company:
Table A
Year Ended 30 June 1981 1982 1983 1984 1985 1986
-----------------------------------------------------------------
'000s '000s '000s '000s '000s '000s
$ $ $ $ $ $
Issued
capital* 1,250 1,250 2,000 3,000 4,000 4,000
Shareholders'
funds 3,024 4,184 4,591 6,342 8,085 9,934
*There was a bonus issue of 500,000 $1 shares in the 1984 year. All other issues were for cash.
16. In that period the underwriting profits varied from year to year as follows:
Table B
Year Ended 30 June 1981 1982 1983 1984 1985 1986
-----------------------------------------------------------------
'000s '000s '000s '000s '000s '000s
$ $ $ $ $ $
(92) 38 (252) 476 1,053 135
- with an overall profit of $1,358,000.
However, from the figures presented in evidence, it seems that for the period from 1 July 1976 to 30 June 1981 there was an overall underwriting loss of $458,000. In the same period, there was an acknowledged investment income of $2,480,000 in addition to ``extraordinary profit'' arising from the sale of investments, whether freeholds or shares.
17. On the other hand, investment income by way of interest on loan moneys and dividends on shares continually rose as follows:
- with an overall profit of over $8,251,000.
18. In conducting its insurance business AMIC on the one hand reinsured and, on the other, maintained what it considered to be a conservative policy as to the creation of reserves. For many years it maintained a ``statutory deposit'' with the Insurance Commissioner but that was refunded during the year of income ended 30 June 1980 when the Insurance Commissioner acknowledged that he had no authority over the applicant. Notwithstanding the absence of any such claim to control by the Insurance Commissioner, the evidence was that AMIC and others sought to maintain reserves as if obliged to do so by standards such as might reasonably have been imposed by the Insurance Commissioner. That position changed from the year ended 30 June 1986 from which time it was asserted by the Commissioner, and accepted by AMIC, that it was subject to the provisions of the Insurance Act 1973. So it was that the assessment of shareholders' funds took into account ``unearned premiums'' as if a liability as follows:
Table D
Year Ended 30 June 1981 1982 1983 1984 1985 1986
-------------------------------------------------------------
'000s '000s '000s '000s '000s '000s
$ $ $ $ $ $
Unearned
premiums 3,774 3,657 3,677 4,833 7,520 8,753
Within shareholders' funds, AMIC acknowledged the following reserves for the Group:
Table E
Year Ended 30 June 1981 1982 1983 1984 1985 1986
------------------------------------------------------------
'000s '000s '000s '000s '000s '000s
$ $ $ $ $ $
Capital profits 706 765 827 472 699 1,728
Claims
equalisation 661 813 974 1,400 2,564 3,245
General 250 250 250 500 500 500
Asset revaluation 500
Retained profits 157 356 540 470 322 461
----- ----- ----- ----- ----- -----
1,774 2,184 2,591 3,342 4,085 5,934
The profits presently in dispute were included in capital profits reserve.
19. Clearly what came to be the more substantial and more consistent contributor to the profitability of AMIC was what it acknowledged as assessable income from its investments. In addition AMIC had ``extraordinary profits'' not acknowledged as assessable income.
20. In its accounts to 30 June 1980 the company acknowledged as extraordinary items:
Table G
$
Profit on sale of investments 513,537
Less losses on sale of investments 39,510
-------
474,027
Less related income tax expense 18,195
--------
$455,832
I find that that ``profit on sale'' was predominantly generated by a profit on the sale of previously owned freehold property.
21. In order to appreciate the significance of the ``quoted shares'' portfolio in the totality of the affairs of AMIC, it is appropriate to consider the following table extracted from the accounts of the company in which assets are brought to account at cost.
Table H
AMIC
Year Ended 30 June 1981 1982 1983 1984 1985 1986
----------------------------------------------------------------------
'000s '000s '000s '000s '000s '000s
$ $ $ $ $ $
Quoted shares 555 484 398 A 4,779
Shares --
subsidiaries 210 210 210 710 2,510B 2,510B
Other 190 250 200 683 961 2,000
--- --- --- ----- ------ ------
955 944 808 1,393 3,471 9,289
Commonwealth stock
and semi-govt.
loans 120 120 513 618 618 618
Mortgages 4,124 3,385 2,209 1,317 982 876
Deposits & unsecured notes 2,469 2,158 2,107 3,636 3,597 3,980
Other 163 190 190 264 335 360
----- ----- ----- ----- ----- ------
7,831 6,797 5,827 7,228 9,003 15,123
Subsidiaries:
Amounts receivable 52 680 1,745 4,154 4,950 1,315
Current assets 383 2,180 2,549 1,628 4,272 4,067
------ ------ ------- ------- ------- -------
$8,266 $9,657 $10,121 $13,010 $18,225 $20,505
A Shares came to hand at a cost of $767 (sic) as a result of a holding
previously sold to Investments.
B By reason of a revaluation the value of shares in subsidiaries was increased
from $2,010,000 to $2,510,000.
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22. In the year of income ended 30 June 1984 the cost to AMIC of the shares sold in that year at cost to Investments was $356,213. Those sales were effected in the way of a ``closing down'' sale. I find that they were not made in the ordinary course of any ongoing activity of AMIC.
23. The table following provides, without reference to the identity or number of shares held or, in relation to shares sold, to either the proceeds of sale or the gain (or loss) on sale, information as to shares held and dealings in them. Furthermore, they do so in relation to both AMIC and Investments. By reason of doing so, the movement of shares from AMIC to Investments and, later, the movement of shares from Investments to AMIC (including the return to AMIC of shares originally held) can be followed. At the same time, the acquisitions of shares by Investments independently of AMIC can also be followed. (So it is that the entry for A43 indicates shares held throughout but transferred during the period from AMIC to Investments.) In addition, it shows that Investments also began purchasing in its own right before buying from AMIC.
Symbol: Indicates:
H (at left) holdings of AMIC at 30 June 1980
P the year quarters in which shares were purchased
x a holding of AMIC
X a transfer between AMIC and Investments
+ a holding by Investments
S a sale
TA take-over offer accepted
PTA partial take-over offer accepted
TS a sale ``on-market'' following take-over offer
SR a sale of ``rights''
R redeemable preference shares
H (to the right) holdings at 30 June 1986
* identifies a share, profit on the sale of which is in
issue for AMIC
** identifies a share, profit on the sale of which is in
issue for Investments
*** the evidence is not clear
1980 1981 1982 1983 1984 1985 1986
QUARTER
b.f. 3.4.|1.2.3.4.|1.2.3.4.|1.2.3.4.|1.2.3.4.|1.2.3.4.|1.2. |
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3 H x x|x x S | | | | | |TA
11 H x x|x x x x |x x x x |x x x x |x x x x |x x x x |R |R
20 H x x|x S x x |x x x S | | | | |TS*
25 H x x|x x x x |x x x x |x x R | | | |R
28 H x x|x x x x |x x x x |x x x x |x R | | |R
35 H P|P x x S | | | | | |
A44 H x x|x S | | P x x |x X | P |x x H |***
| | | P + + |+ P + + |+ + + + |+ + H |***
50 H x x|x S | | | | | |TS
A43 H x x|x x x x |x x x x |x x x x |x X + + |+ + + + |+ + H |
A42 H x x|x x x x |x x x x |x x x x |x X | P |x x H |
| | | P P + |P P P + |+ + + + |+ + H |
A31 H x x|x x x x |x x x x |x x x x |x X | | |
P|P + + + |+ + + + |+ P + + |+ X S S |+ + + + |S |TS**
A29 H x P|x x x x |P x x x |x x x x |x X | P |+ X H |
| | P + + |+ + P + |+ X + + |+ + + + |+ X |
A8 H S P|x x x x |x x x x |x x x x |x X | | X H |
| P |P P + + |+ + + + |+ P + + |P + + + |+ X |
A2 H x x|x x x x
The Investments gains
24. In the years of income ended 30 June 1984 and 1985, excluding shares sold to AMIC, the shares sold by and the profits derived by Investments upon those sales were as follows:
First Code
purchase No. Company sale Sold Proceeds Profit
$ $
Oct. 1981 71 W.R. Carpenter Aug. 83 38,193 11,365
May 1982 97 Weston Foods July 83 27,602 6,867
Apr. 1983 89 National Consol. Nov. 83 18,682 574*
Oct. 1983 A37 Nile Textiles Dec. 83 42,859 19,381*
Dec. 1980 A1 Alliance
Holdings Apr. 84 82,005 38,910
Apr. 1984 A1 Alliance
Holdings Apr. 84 82,005 39,810*
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Profit to 30.6.84 117,807
Less profit sec.26AAA* 59,765*
-------
Balance Profit to 30.6.84 58,042
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Jan. 1984 69 Bank of
Queensland Feb. 84
May 85
The assessability of AMIC
25. In my view the most appropriate way to approach the present problem is to consider whether the applicants are liable to assessment by force of sec. 25(1) of the Act. Should those questions be resolved in favour of the taxpayers it would then be necessary to make findings on a sale-by-sale basis as to whether the subjective-purpose tests or ``profit-making scheme'' tests of sec. 25A, or the date of acquisition tests of sec. 26AAA, rendered the applicants liable to assessment.
26. In my view the issue as to whether or not the profits constitute assessable income is to be determined by the application of the principles expressed by Lord Justice Clerk in
Californian Copper Syndicate Limited and Reduced v. Harris (1904) 5 T.C. 159: that test being again confirmed by the High Court of Australia in London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106. I quote more fully than is usual the statement of principle by Lord Justice Clerk. He said (at pp. 165-166):
``It is quite a well settled principle in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make a gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they
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make is liable to be assessed for income tax.What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making.''
27. In seeking to apply that test one must be guided by decisions of the High Court of Australia and, in particular, those in London Australia Investment Co. Ltd. (ante): and
F.C. of T. v. The Myer Emporium Ltd. (87 ATC 4363). The issues are not to be determined by an assessment of similarities or dissimilarities of fact in other decided cases but by applying those principles to the facts established in the instant case. Some of the principles which emerge from a consideration of the decision in London Australia Investment Co. Ltd. (ante) are:
- • ``not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the Act'' (Gibbs J., ATC p. 4403; C.L.R. p. 116);
- • ``different considerations may apply depending on whether the taxpayer is an individual or a company'' (ibid., ATC p. 4403; C.L.R. p. 116);
- • ``[In the case of a company,] it is necessary to have regard to the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realisation which produced the profit'' (ibid., ATC p. 4403; C.L.R. p. 116);
- ``[Where] the company's business was to invest in shares with the primary purpose of obtaining income by way of dividends, [and] the conduct of [that] business required that the share portfolio should be given regular consideration, and that shares should frequently be sold when the dividend yield dropped [with the result that] the taxpayer systematically sold its shares at a profit for the purpose of increasing the dividend yield of its investments... [then it was appropriate to find that] the sale of the shares was a normal operation in the course of carrying on the business of investing for profit [and] was not a mere realisation or change of investment'' (ibid., ATC pp. 4403-4404; C.L.R. p. 117);
- • that the business of banking and of insurance had no special nature, in that ``if the sale of the shares is an act done in what is truly the carrying on of an investment business the profits will be taxable just as they would have been if the business had been that of banking or insurance'' (ibid., ATC p. 4404; C.L.R. p. 118);
- • ``the position of an investment company is materially different from that of an individual managing his own portfolio of shares. It is different also from that of a trustee managing a portfolio of shares in a trust fund'' (ibid., ATC p. 4404; C.L.R. p. 118);
- • ``the value of the shares sold in absolute terms and expressed as a percentage of the entire share portfolio is material'' (Gibbs J., p. 115 [sic]);
- in my view, the latter consideration being the more significant;
- • ``once profits on sale are found not to fall within the first limb of sec. 26(a), the determinant is the carrying on of a business, not any associated business in a general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profit'' (Jacobs J., ATC p. 4410; C.L.R. p. 128);
- • ``frequent activity of acquisition and resale does not necessarily signify a business... but may itself tend to show that it was not of a private or of a casual nature, but that rather the person is carrying on the activity as a business operation'' (ibid., ATC p. 4410; C.L.R. p. 128);
- • ``... that a course of activity on the part of a company otherwise engaged in commercial activity may more readily be termed a business than one on the part of an individual but no great emphasis should be given to this feature'' (ibid., ATC p. 4410; C.L.R. p. 129);
- • ``... in so far as the original capital [of a banking or insurance company] or that capital enhanced by accumulated profits is laid out in investments in property and not
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in the business activity of banking or insurance, the investments will have the character of capital and profits or losses on a sale thereof will not be profits of the business of banking or insurance'' (ibid., ATC pp. 4410-4411; C.L.R. p. 130).
28. More recently, in the Myer case, the Judges of the High Court in a joint judgment said (at ATC pp. 4368-4369):
``The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective `mere' (
Whitfords Beach, at 82 ATC pp. 4046-4047; 150 C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia, at 77 ATC pp. 4403-4404; 138 C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.''
29. Although the inference that profit upon the sale of investments is an integral part of a business may be more readily drawn in relation to persons carrying on business as bankers or insurers, in my view, that consideration is not of great significance in the present case. The decisions of the High Court of Australia in
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604;
Producers' & Citizens' Co-operative Assurance Co. Ltd. v. F.C. of T. (1957) 95 C.L.R. 26; and
Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502; happen to be cases in which the finding was made that profits on such sale of investments were assessable. They also happen to be cases in which the taxpayers were carrying on the business of life assurance in which the insurer could be on risk for 10, 20 or 50 years or more and yet might be called on to meet claims arising immediately the policy was underwritten. In such cases the capacity of the insurer to meet claims as they arose depended upon their capacity to effectively invest premiums pending the maturity of claims. The product of those investments would be as much profits arising upon realisation as rents, interest or dividends obtained in the interim. But that description is not wholly appropriate in relation to the insurance business of AMIC. Its risk was not ongoing. It insured from year to year. Its aim was - but was not always realised - that on a year-by-year basis, a profit would arise from its insurance business. The need to have reserves built up from investments was not so much conditioned by uncertainty as to the long-term future but only as to the risk of an abnormally high incidence of claims arising in relation to any particular year - a risk prudently provided for. In some sense then I hold that AMIC had reached a point which its reserves were so large relative to its risk that the management of its investment portfolio was not to be appropriately described as an element of its insurance business but rather as an independent activity. The activity of the company in London Investment (ante) was similar to that of Investments. It was also similar, in the circumstances of the case, to AMIC, save that AMIC did carry on business as an insurer, whereas London Investment carried on no other business than that of an investor.
30. Bearing all of the foregoing in mind, it is not appropriate to simply say either that all profits to AMIC arising upon the sale of its holdings are assessable or not assessable. It may have been that the profit realised on the sale of real estate in 1979 did not generate assessable income. It might be that if AMIC were to sell its shares in its subsidiary, Investments, any profit arising upon such a sale would not constitute assessable income. But those issues do not arise. The questions for determination are whether the profits arising upon the sale of shares as detailed in the foregoing tables constitute assessable income. In my view they do.
31. I am satisfied that many of the shares were acquired in the expectation that take-over
ATC 161
offers would be forthcoming and that the making of such offers and even the market expectation that such offers would be made would lead to rises in share values in the market and provide opportunities to sell at a profit and, quite often, to sell quickly at a profit. Those expectations were fulfilled in many cases and resulted in shares being sold within 12 months of the date of their acquisition. The profits so generated constituted assessable income by reason of sec. 26AAA of the Act but, as I indicated in another decision delivered this day (No. TT88/98) [reported as Case W8,89 ATC 171], sec. 26AAA need not be the only basis for founding a liability to tax in such circumstances. Further, although many such sales eventuated within 12 months of acquisition, some did not. Realisation of profit sometimes took a little longer and sometimes did not eventuate for quite a substantial period. But, in my view, even though I accept that, in relation to the share transactions in issue before me, profit-making by sale was not the dominant purpose of the acquisition, none the less, the expectation of profit from rises in values was one of the aims of the transaction and with it, in my view, went the prospect of realising that gain by sale.
32. In reaching that conclusion I have taken into account the circumstance that, of the 15 companies in which shares were held by AMIC at June 1980, six holdings continued at 30 June 1986 either in the hands of AMIC or Investments. Similarly, I have borne in mind that, at 30 June 1986, AMIC held a substantial portfolio including many shares which had been held for significant periods either by AMIC or by Investments. But having said that, one cannot overlook the circumstance that large numbers of shares which were sold at a profit were held but briefly and few indeed were held throughout the period of six years in relation to which there has been made ``both a wide survey and an exact scrutiny of the taxpayer's activities''.
The liability of Investments
33. In relation to Investments it is appropriate to acknowledge that the line of ``insurance cases'' does not need to be referred to. The principles to be applied are the principles previously cited: best illustrated by their application in London Investment.
34. In relation to Investments I am satisfied that the same principles were applied in the selection of shares to be purchased as with AMIC and that, as the table (para. 23) reflects, and as was acknowledged by Mr Church in evidence, Investments as much as AMIC had a particular interest in seeking capital profits out of take-overs. That is to say that, just as with AMIC, one of the objectives on the part of Investments was to buy shares which would rise in value in the market-place and do so, hopefully promptly, thereby creating opportunities for a profit to be taken either by selling on market or accepting the take-over. I am not persuaded that the sales which generated the profits in question before me were ``mere realizations''.
Conclusion
35. There was no dispute raised as to quantum and, since the losses - the rare losses - which were suffered in the period have been allowed for by the Commissioner in assessing both applicants, it is appropriate for the Tribunal to order that the assessments of the Commissioner under review in relation to both applicants be affirmed.
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