Employers Mutual Indemnity Association Ltd v. Federal Commissioner of Taxation

68 CLR 165

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(Judgment by: RICH J)

Employers' Mutual Indemnity Association Ltd
v. Federal Commissioner of Taxation

Court:

Judges: Latham CJ

Rich JStarke J
McTiernan J
Williams J

Subject References:
Taxation and revenue
War-time company tax
Mutual indemnity association
Co-operative insurance company

Legislative References:
War-time (Company) Tax Assessment Act 1940 No 90 - s 14(b); s 14(d)
Income Tax Assessment Act 1936 No 27 - s 117

Hearing date: 10 November 1943; 11 November 1943
Judgment date: 1 December 1943

SYDNEY

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Judgment by:
RICH J

The question which arises for determination in the present appeal is whether the appellant company is exempt from the provisions of the War-time (Company) Tax Assessment Act 1940 by reason of s. 14 (b) or 14 (d) of that Act. Section 14 (b) exempts a co-operative company as defined in s. 117 of the Income Tax Assessment Act. Section 14 (d) exempts a company (not being a company carrying on the business of financing time payments, instalments or hire-purchase sales, or of providing cash orders) in which little or no capital is required, to the extent to which the Commissioner is satisfied that its profit arises from commissions, fees or charges for services rendered.

The company in fact carries on the business of insuring employers against liability to pay workers' compensation and of motor car insurance, the former being its principal activity.

By s. 117 of the Income Tax Assessment Act 1936-1940 "co-operative company" is defined to mean a company the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever, and includes a company which has no share capital, and which in either case is established for the purpose of carrying on any business having as its primary object or objects (one or more of certain stated objects of which the only one suggested to be relevant is) the rendering of services to its shareholders.

The first question which arises under s. 14 (b) is whether, assuming the company to possess all other qualifications for exemption under the clause, it can be regarded as carrying on a business having as its primary object or objects the rendering of services to its shareholders. I am unable to see anything in the fact that it is insurance business which it carries on which prevents it from being so regarded. The phrase "rendering of services" is as wide as could well be devised. The definition does not say rendering of services under contracts of service in the technical sense. It says "rendering of services" generally, without any limitation either expressly stated or involved in the context. A person who insures another against risk of loss is rendering him service in a very real and perfectly natural sense of the term. The restriction which the clause associates with the phrase is directed not to the nature of the services but to the persons to whom they are rendered. So long as it is to its members that the company is to render services as its primary object, it is, in my opinion, immaterial what those services are. If any doubt could be felt on the point, it is, in my opinion dispelled by the provisions of s. 14 (d). The express exclusion from that clause of companies carrying on the business of financing time payments, instalments or hire-purchase sales, or of providing cash orders, shows plainly that the legislature was in this context using the phrase "render services" in a sense wide enough to include the operations of these companies if they were not excluded, and therefore not in a sense referable to "contracts of service." There is no reason to suppose that the legislature intended the phrase to be understood in any narrower sense in s. 117 of the Income Tax Assessment Act when it is incorporated by s. 14 (b). There is nothing inconsistent with this view in s. 121 of the Income Tax Assessment Act, which refers specifically to "every association of persons formed for the purpose of insuring those persons against loss, damage or risk of any kind in respect of property." On the contrary, it is obvious that co-operative associations rendering services of this type were in that Act singled out for separate treatment, not because they are not co-operative companies within the meaning of s. 117, but because (notwithstanding that they are insurance companies) they are, and, it being thought desirable to make special provision as to the basis of their assessment for income tax, it was necessary to deal with them separately and specially and not leave them to be covered by the general provisions of s. 119, which would otherwise have been applicable. Indeed, s. 121 provides strong confirmation for the view that s. 117 (d) in the context in which it is found in the Act from which it is borrowed, as well as in the context into which it is introduced, is to be read in its ordinary natural sense, and is wide enough to include insurance services.

Since the company has no share capital and is in fact established for the purpose of carrying on a business which has as its primary object the rendering of indemnity services, the only remaining title to exemption which it must establish in order to come within s. 14 (b) is that it should be to its "shareholders," in the sense of members, that it is to render those services. On this point the evidence and findings of the Board are all one way. Evidence was given by Mr. White, the secretary of the company, that "the whole 100 per cent of the business is done with members, in that we do not have anything to do with anyone who does not become a member. That is the only way they can get any benefit or have any service rendered for them, that is, by becoming members." The articles of association contemplate that a person desiring to obtain indemnification by the company must, in the course of doing so, become a member. This evidence was obviously accepted by the Board of Review, which has made a finding that "a person becomes a member of the Association by applying for and being granted a policy of insurance (workers' compensation or motor car)."

In these circumstances I am of opinion that, on the evidence and findings, the appellant company is a company established for the purpose of carrying on a business having as its primary object the rendering of services to its shareholders. It is quite true that the company could be so reorganized as to admit of its being carried on as a non-co-operative company (although clause 3 (E) of the memorandum of association is perhaps significant as indicating the sense in which it appears to have been taken for granted that the general language of the rest of the clause was to be understood), but for the purpose of ascertaining the objects for which the company was in fact established, whatever may be the scope of its general powers, it is legitimate, and may be necessary, to examine the provisions of the contemporaneous articles of association (Anderson's Case, ^[F2] at p. 79). When these are adverted to, there can, I think, be no doubt that the company was at any rate established as a co-operative company, and that it could not be carried on upon any other footing without a complete remodelling of its articles. The contract inter socios constituted by the articles of association (which are its original articles) makes it a co-operative company, and, according to the evidence, it has always been carried on as such. Hence there is nothing in the observations of Dixon J. in Shelley v Federal Commissioner of Taxation, ^[F3] at p. 231, which is inconsistent with the conclusion at which I have arrived. It follows, in my opinion, that the appellant company has, upon the Board's findings of fact, brought itself as a matter of law within the provisions of s. 14 (b), and that the appeal should be allowed.

In these circumstances it is not, in my view of the case, necessary to pass upon the question whether the company is entitled to exemption under s. 14 (d), as being one in which little or no capital is required, to the extent to which its profit arises from commissions, fees or charges for services rendered. I may say, however, that upon this question I am in agreement with the conclusion arrived at by my brethren.

I adhere to the view which I ventured to express in Incorporated Interests Pty Ltd v Federal Commissioner of Taxation, ^[F4] that the phrase "capital required" means the stock, money or wealth in any form necessary for the operations of the particular company during its accounting period, that is, de facto required by a company carrying on such a business as the company in question is in fact carrying on. Quite apart from the substantial deposit of money which such a company is by law required to make as a condition of carrying on such a business, it is obvious that no company could carry on an insurance business without possessing or being in command of substantial capital. Even the Anglo-Bengalee Disinterested Loan & Life Assurance Co , the paid-up capital of which, according to its chairman of directors, was to be "a figure of two, and as many oughts after it as the printer can get into the same line", needed for its activities the capital provided by its dupes.

It follows that, in my opinion, the appeal should be allowed on the ground that, upon the Board's findings, the appellant company is within the provisions of s. 14 (b), although not within those of s. 14 (d).