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

Judges: Latham CJ
Rich J
Starke 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

SYDNEY

Judgment by:
WILLIAMS J

The respondent Commissioner assessed the appellant company for war-time (company) tax for the year which ended on 30th June 1940. The company did not dispute the correctness of the amount for which it was assessed if it was liable to pay the tax, but it objected to the assessment on the grounds that it was exempt under the provisions of s. 14 (b) or (d) of the War-time (Company) Tax Assessment Act 1940.

The Commissioner disallowed the objection and the company appealed to the Board of Review.

Section 14 of the War-time (Company) Tax Assessment Act provides, so far as material, that the Act shall not apply to: (b) a co-operative company as defined in section one hundred and seventeen of the Income Tax Assessment Act; or to (d) 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.

Section 117 of the Income Tax Assessment Act 1936-1940, which is the Act referred to in s. 14 of the War-time (Company) Tax Assessment Act, provides, so far as material, that-" `co-operative company' means 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 the following:... (d) the rendering of services to its shareholders."

The Board of Review decided that the company was not exempt under either sub-s. b or d of s. 14 of the War-time (Company) Tax Assessment Act and confirmed the assessment.

The company has now appealed to this Court.

The appeal in the original jurisdiction of this Court came before my brother McTiernan, who referred it to the Full Court under the provisions of s. 18 of the Judiciary Act 1903-1940. Under s. 196 of the Income Tax Assessment Act the company can only appeal from a decision of the Board of Review on a question of law, so that the appeal can only succeed if the company can satisfy the Court that on the evidence the Board could not have reasonably come to the above decision. As the assessment is prima facie evidence of its validity the company must then satisfy the Court that on the facts it has brought itself within sub-s. b or d of s. 14 (Federal Commissioner of Taxation v Broken Hill South Ltd; ^[F17] Maughan v Federal Commissioner of Taxation ^[F18] ).

As to the objection that the company is a co-operative company within the meaning of s. 117 of the Income Tax Assessment Act 1936-1940:Mr. Taylor for the respondent submitted several contentions why the appellant does not come within this section. In order to succeed the appellant must prove that it was established for the carrying on of a business having for its primary object or objects one or more of the activities referred to in pars. a to e inclusive. The only activity relied on by the appellant is that it has as a primary object the rendering of services to its shareholders.

The appellant is a company which was established in order to carry on the business of insurance in all its branches, but since its incorporation it has been carrying on in the main the business of insuring employers against liability under the Workers' Compensation Act 1926-1938 (N.S.W.), and in a subsidiary but substantial manner the business of motor car insurance. But an insurance business is not, in my opinion, a business the object of which is to render services to any persons, whether shareholders or not. Contracts of insurance, other than life insurance, are contracts of indemnity and of indemnity only (Castellain v Preston, ^[F19] at p. 386), whereas the rendering of services must result from contracts of service or for services. Contracts of service or for services are not specifically enforceable in equity because they contain an element of personal and confidential relationship, and it is not in the interests of society that persons who are not desirous of maintaining continuous personal relations should be compelled to do so. There is nothing personal or confidential in a contract of indemnity. It is simply a contract by one person to indemnify another person against liability on the occurrence of some uncertain event. When that liability crystallizes into an actual liability by the occurrence of the event, equity will specifically enforce the contract by ordering the indemnifier to pay the amount for which he has become liable either to the person indemnified or to the creditor of the person indemnified. In the case of an insurance it is a contract uberrimae fidei. The indemnity may be against a fund and not against a person. It is a contract which may be express or implied and which may take many forms: See Halsbury's Laws of England, 2nd ed., vol. 16, pp. 9 and following. It would be difficult, for instance, to classify as a contract of service or for services the implied indemnity which arises in favour of a vendor in the case of the purchase of an equity of redemption. The indemnifier does not render any services to the person indemnified except to pay the amount which he has become liable to pay on the occurrence of the uncertain event. Apart from statute, the person indemnified is not bound on receipt of the money to apply it in discharge of the liability against which he has been indemnified. The amount received becomes part of his general assets (In re Harrington Motor Co Ltd ; Ex parte Chaplin ^[F20] ). The words in s. 117 are of course used in a popular and not in a technical sense, so that it may be urged that these considerations are more relevant to the determination of the technical meaning of a contract of indemnity than to the elucidation of the population meaning of the rendering of services. But a glance at several standard dictionaries shows that in common parlance the expression refers to services of a personal nature.

The same expression occurs in s. 14 (d) of the Act, and the circumstances that in this sub-section the profit that is exempted is profit which arises from commissions, fees or charges for services rendered assists the conclusion that the services to which s. 117 refers are services which would be remunerated by commissions, fees or charges and therefore services and earnings of a personal nature. Contracts of insurance (and the policies issued by the appellant are no exception) usually authorize the insurance company to investigate, settle and litigate claims, but these provisions are inserted in the policy for the protection of the insurance company, and acts which an insurance company does in pursuance of these provisions are done by the company on its own behalf and for its own protection and not as a service to its policy holders. For these reasons, and without expressing any opinion upon the other objections raised by Mr. Taylor, I am of opinion that the Board came to a right conclusion that the appellant is not a co-operative company within the meaning of the War-time (Company) Tax Assessment Act, s. 14 (b).

As to the objection founded on the War-time (Company) Tax Assessment Act, s. 14 (d):The reserve fund of the company consists of profits accumulated by the company in the course of its business. Mr. Leaver contended that this fund is the property of the shareholders and not of the company. The articles of association give to shareholders and ex-shareholders certain rights against this fund, but these rights are not such as to make the company an agent or trustee of the fund for the shareholders. They are rights against the fund on the basis that the fund forms part of the property of the company. Mr. Leaver also contended that the appellant is a company which requires little or no capital for the conduct of its business. This Court has decided in Incorporated Interests Pty Ltd v Federal Commissioner of Taxation ^[F21] that the Act refers to commercial capital; and I adhere to the opinion which I expressed in that case that s. 14 (d) refers to the class of business which a company is conducting and not to the circumstances of each particular company. Apart from statutory requirements, a company which carries on an insurance business could not be aptly described as a company in which little or no capital is required for the conduct of its business. In addition, the main activity of the appellant, as I have already said, is to carry on workers' compensation insurance, and the Workers' Compensation Act 1926-1938 (N.S.W.), s. 19, requires the appellant to deposit PD10,000 with the Colonial Treasurer, so that the appellant plainly requires considerable capital in order to carry on this class of insurance business.

For these reasons I am of opinion that the Board also came to a right conclusion that the appellant is not exempt under the provisions of s. 14 (d).

The appeal should be dismissed.