Employers Mutual Indemnity Association Ltd v. Federal Commissioner of Taxation

68 CLR 165

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(Judgment by: McTIERNAN J)

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

Court:

Judges: Latham CJ
Rich J
Starke J

McTiernan JWilliams 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:
McTIERNAN J

The Employers' Mutual Indemnity Association is an incorporated company limited by guarantee. It has no share capital. The memorandum of association shows that the objects of the company include various classes of insurance. But registration as a company is necessary to entitle the association to carry on its business (Companies Act 1936 (N.S.W.), s. 8; In re Padstow Total Loss and Collision Assurance Association ^[F6] ). The company was served with a notice of assessment showing that it was assessed to tax pursuant to the War-time (Company) Tax Assessment Act 1940, the assessment being based on taxable profit derived during the year ended 30th June 1940. Section 34 of this Act made applicable to this assessment the provisions of Div. 2 of Part V. of the Income Tax Assessment Act 1936-1940, relating to reviews and appeals. The company objected to the assessment on grounds depending on s. 14 (b) and s. 14 (d) respectively of the War-time (Company) Tax Assessment Act 1940. The Commissioner of Taxation having wholly disallowed the objection, at the company's request he referred his decision to the Board of Review, which confirmed the decision, and the company appealed to the High Court from the decision of the Board. This appeal is based on s. 196 (1), which is contained in Div. 2 of Part V. of the Income Tax Assessment Act 1936-1940, and provides that the Commissioner or taxpayer may appeal to the High Court from any decision of the Board which involves a question of law.

This appeal is a proceeding in the original jurisdiction of the Court. Rule 13 of the Rules of this Court governing the appeal provides that the appeal shall (subject to s. 18 of the Judiciary Act 1903-1940) be heard before a single Justice and shall be by way of an original hearing. The "materials" (as they are described in rule 14) which were prepared for the use of the Court pursuant to rule 15 of the above-mentioned Rules contained the evidence given by the only witness called in the case (he was called on behalf of the company), the memorandum and articles of association, certain of the company's accounts, the Board's decision, and its reasons for the decision. The admissions of fact are contained in the oral evidence. The company and the Commissioner were content to rely upon those materials, and neither party wished to adduce any further evidence or add to those materials. It was agreed that the questions raised by the appeal were of general importance, and with the concurrence of both parties a direction was given pursuant to s. 18 of the Judiciary Act 1903-1940 that the whole case be argued before the Full Court. This course was taken in Federal Commissioner of Taxation v Broken Hill South Ltd ^[F7] - See also Trustees Executors & Agency Co Ltd v Federal Commissioner of Taxation, ^[F8] Ruhamah Property Co Ltd v Federal Commissioner of Taxation. ^[F9] Some instances of cases in which a direction was given that a case consisting of evidence be argued before the Full Court are Riverina Transport Pty Ltd v Victoria, ^[F10] Deputy Federal Commissioner of Taxation (N.S.W.) v W. R. Moran Pty Ltd, ^[F11] at p. 767.

The appeal is not competent unless the decision of the Board involves a question of law. In so far as its objection to the assessment depends upon s. 14 (b) of the War-time (Company) Tax Assessment Act 1940, the company claimed that it is a co-operative company as defined in s. 117 of the Income Tax Assessment Act 1936-1940. This claim was based on the ground that it has no share capital and is solely engaged in rendering services to its members. The nature of these services was stated to be adjusting and paying claims against its members under the Workers' Compensation Act (N.S.W.) and other similar Acts and at common law. And in so far as its objection depends on s. 14 (d) of the War-time (Company) Tax Assessment Act 1940, the company claimed that no capital is required for carrying on its business and that none has ever been employed throughout the period of its existence, and that any profits which it has derived have arisen from charges for services rendered to its members.

Section 14 (b) of the War-time (Company) Tax Assessment Act provides that the Act "shall not apply to a co-operative company as defined in section one hundred and seventeen of the Income Tax Assessment Act." This means the Income Tax Assessment Act 1936-1940. The company comes within that definition in so far as it has no share capital.

The question is whether it comes within the other part of the definition. Its claim is based on the ground that it is established for the purpose of carrying on a business having as its primary object or objects the rendering of services to its shareholders. The company's memorandum does not limit its objects to the insurance only of its own members and their property. The memorandum may be contrasted with that, for example, in the case of Lion Mutual Marine Insurance Association Ltd v Tucker. ^[F12] There the memorandum said that the association was a company limited by guarantee and not having a capital divided into shares and that the objects for which the association was established were:

"The mutual insurance by the association

(a)

of the ship of the members ...":

and with Form B in the Third Schedule of the Companies (Consolidation) Act 1908 (Imp.), which contains a memorandum for a company limited by guarantee and not having a share capital. The third paragraph of this memorandum is:

"The objects for which the Company is established are the mutual insurance of ships belonging to members of the Company ..."

In Shelley v Federal Commissioner of Taxation, ^[F13] the question arose whether the company of which the taxpayer was a member, was a co-operative company within the meaning of s. 20 (1A) of the Income Tax Assessment Act 1922-1928. This section set out the attributes which a company should have to be a co-operative company for the purposes of s. 20 (1) of that Act, which dealt with the calculation of the taxable income of a co-operative company. Section 117 is wider than s. 20 (1A) to the extent that it includes a company which has no share capital and adds "the rendering of services to its shareholders" to the objects mentioned in s. 20 (1A). In that case Dixon J. said:

"But whatever characteristics may be required in order to bring a company within that expression" ("co-operative company"), "it seems reasonably clear that the company must possess them by virtue of its constitution. It is not enough that a company may in fact conduct a series of transactions upon principles which justify the title of 'co-operative'". ^[F14]

Although the memorandum does not limit the objects for which the company is established to the insurance of the members of the company or their property, yet the articles of association make it reasonably plain that the company is established for the purpose of carrying on a business having as its primary object the insuring of the members or of their property.

The members of the Board said:

"In a broad sense all purely mutual insurance companies are formed with the primary object of rendering services to their members."

But the members rejected this "broad construction" for the reason that the context of s. 117 shows that the word "services" is used in a sense which is not wide enough to include insurance and that this view is necessary to make s. 117 (d) consistent with ss. 119 and 121 and also with Div. 8 of Part III. of the Income Tax Assessment Act 1936-1940.

The effect of s. 14 (b) is to bring into the War-time (Company) Tax Assessment Act by reference, the definition of co-operative company in s. 117 of the Income Tax Assessment Act. In the case of Mayor etc of Portsmouth v Smith, ^[F15] at p. 371 Lord Blackburn said: "Where a single section of an Act of Parliament is introduced into another Act, I think it must be read in the sense which it bore in the original Act from which it is taken, and that consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated in the new Act." In my opinion it is not the intention of s. 14 (b) to incorporate s. 117 in the War-time (Company) Tax Assessment Act. The intention is, as I have stated, to bring in by reference the definition of co-operative company and to provide that the War-time (Company) Tax Assessment Act is not to apply to a company which is within that definition. The rule of interpretation which applies is that which was stated by Lord Esher in the case of In re Wood's Estate, ^[F16] at p. 615: "If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in with the pen, or printed in it, and the moment you have those clauses in the later Act. you have no occasion to refer to the former Act at all." The present case is an instance of legislation by reference to a section of a former Act, not an instance of a section of a subsequent Act incorporating a section of a former Act. It follows that the words used in s. 117 to express the definition of a co-operative company should be construed as if they appeared as a definition clause or an interpretation clause in the War-time (Company) Tax Assessment Act 1940.

It is evident from the words of the definition that par. d has in contemplation objects which are not properly described by pars. a, b, c or e. The words "the rendering of services to its shareholders" have the ordinary general meaning of the words as applied to the subject matter with regard to which they are used. They are used to apply to a service which would be the primary object or one of the primary objects which a company governed by the rules mentioned in the definition or having no share capital might be established to carry on. The word "services" does not mean services rendered pursuant to a contract of employment between master and servant. The word refers to services which are of the same nature as those rendered by a business enterprise in satisfying the business needs of persons having recourse to it. It is within this ordinary general meaning of the expression "the rendering of services" to say that an insurance company renders services to its policy holders by covering them against loss or damage to their property or claims by workmen in their employment, and by performing the promises in the policies upon the happening of the loss, damage or claim insured against.

In my opinion upon the true construction of the definition of a co-operative company which s. 14 (b) enacts by reference to s. 117 of the former Act, the subsequent Act, the War-time (Company) Tax Assessment Act, does not apply to this company. According to this opinion the company is not liable to taxation under this last-mentioned Act.

It is unnecessary to deal with the question whether the company is exempted by s. 14 (d) of the War-time (Company) Tax Assessment Act. I do not pass upon the contentions that were made to support the claim that the company is one in which little or no capital is required.

In my opinion the appeal should be allowed and the assessment set aside.