Royal Automobile Club of Victoria (R.A.C.V.) v. Federal Commissioner of Taxation.

Judges:
Anderson J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 26 October 1973.

Anderson J.: These are three appeals, brought before a single Judge of the Supreme Court of Victoria, pursuant to sec. 187(b) and 197 of the Commonwealth Income Tax Assessment Act 1936-1970, by the appellant, Royal Automobile Club of Victoria (R.A.C.V.), against three assessments under that Act in respect of income tax assessed by the respondent, the Commissioner of Taxation for the Commonwealth of Australia, for the three years ended respectively, 29 February 1968, 28 February 1969 and 28 February 1970. The appellant is a company limited by guarantee. It has its origin in a club founded in 1903 for the purpose of providing for its members social amenities and certain services in relation to motor cars. In about 1925 it developed further by the admission to its membership of what were called ``service members'' who were entitled to the automobile services of the club but not the social amenities which ``club members'' enjoyed. With this dual form of membership the appellant developed into a very substantial organisation and in the three years to which the assessments under appeal relate its service membership numbered somewhat more than 400,000 and its club membership numbered between 27,000 and 28,000.

As the appellant club developed numerically, so did its activities and the services which it rendered to its members. In the years in question it was the owner of a large modern city building at 123 Queen Street, Melbourne, almost the whole of which it occupied for the purposes of its members' activities. One floor was leased to a finance company, Commercial & General Acceptance Ltd., (referred to as C.A.G.A.) with which it was associated. Of that part of 123 Queen Street which was utilised by the appellant, (i.e. all but one floor) 48% was devoted to what may be termed ``house'' activities, i.e. the provision of dining, drinking and other social facilities and accommodation for the club members, and 52% was devoted to the other activities of the appellant. The ``house'' activities of the appellant are relevant only to a minimal degree in these appeals as also are those of the appellant conducted at its Country Club premises at Healesville and the ``house'' and Healesville activities may be ignored in what I have to say, except when particular mention is made of them. The ``house'' and Country Club form a self contained unit, hereinafter referred to as the ``house'' having its own staff, both administratively and otherwise and from a business point of view virtually unconnected with the rest of the organisation of the appellant, except at top level overall management. Only club members are entitled to partake of the ``house'' facilities, and the ``house'' is conducted in the same way as any other club providing similar amenities to its members.

There are features of the appellant's organisation which, if not unique, are at least unusual and on that account give rise to a number of problems of some complexity. Though the ultimate objective of these appeals may be simply stated as being the determination of the appellant's taxable income by the deduction from assessable income of all allowable deductions, the determination of what is assessable income and what are allowable deductions is not readily arrived at because of the nature of the appellant's several activities. The appellant provides services and facilities for both club members and service members. The services and facilities available to all members are extensive and for convenience may be classified in departments which I shall shortly enumerate. Additionally, certain of the services and facilities are available to persons who are non-members of the appellant, who in some instances may pay for the such services and facilities. Certain of the services and facilities are engaged in by the appellant at a loss, some at a profit. The appellant's revenue is from members'

ATC 4156

subscriptions and charges made for some services and from other activities which include certain commissions, interest on investments and rent from property.

The important consideration in these appeals is whether what has come to be called the doctrine or principle of mutuality - a form of immunity from income tax - applies to the appellant. Both parties are agreed that, so far as the ``house'' is concerned, the doctrine of mutuality applies, and receipts of the ``house'', except to a minimal extent not in dispute, enjoy the immunity of the doctrine. The doctrine equally applies in respect of certain other mutual activities, such as road service and the touring department. Whether the other activities of the appellant enjoy the same immunity, and if so, to what extent, are questions of primary importance in these appeals.

It has been long established and many times reaffirmed that in the field of income tax the principle of mutuality may relieve wholly or in part certain associations from liability to tax. In
The Social Credit, etc. Society Ltd. v. F.C. of T. 71 ATC 4232; 45 A.L.J.R. 675, at p. 4238, Gibbs, J., has succinctly described the principle. His Honor said: "Where a number of people, associated together for a common purpose, have contributed to a common fund in which all the contributors are interested, the surplus of their contributions remaining after the fund has been applied to the common purpose `is in essence a return of their own moneys which they have overpaid and is not a profit' (
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604, at pp. 618-9). This principle has found particular application in the cases of mutual investment funds and members' clubs. It may apply notwithstanding that the people thus associated have been incorporated, for the corporation is treated `as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate' (
English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income Tax, Assam (1948) A.C. 405, at p. 419). Since the members of an association may at the same time engage in dealings that are mutual and business that is not, it may be necessary, and is permissible, to sever a fund which consists of receipts from mutual dealings as well as other receipts:
Carlisle and Silloth Golf Club v. Smith (1913) 3 K.B. 75;
Municipal Mutual Insurance v. Hills (H.M. Inspector of Taxes) (1930-1932) 16 T.C. 430;
National Association of Local Government Officers v. Watkins (H.M. Inspector of Taxes) (1934) 18 T.C. 499;
Revesby Credit Union Co-operative Ltd. v. Commissioner of Taxation (Cth) (1965) 112 C.L.R. 564, at 575." The principle enunciated by Gibbs, J. has been in effect affirmed by the Full High Court in a recently delivered judgment, in
Sydney Water Board Employees' Credit Union Ltd. v. F.C. of T. 73 ATC 4129.

In
Fletcher v. Income Tax Commissioner (1971) 3 All E.R. 1185, Lord Wilberforce, at pp. 1189-90 said: ``Three main fields in which the mutuality principle has been applied are insurance, rating and clubs. In the insurance cases a group of persons form a common pool by contributions, which pool is then used to indemnify against losses... The analysis of these arrangements which is now accepted is that, although there may be a trade, there are no profits.'' His Lordship referred to rating cases and then continued: ``The classic case as to members' clubs is Carlisle and Silloth Golf Club v. Smith (1912) 2 K.B. 177; 6 Tax Cas. 48, which brings out the distinction between members, contributing on a mutual basis in order to secure an amenity, and outsiders admitted to participate in amenities on payment, with whom the club is trading.'' In the Carlisle and Silloth Golf Club case, it was held that to the extent that the club received payment from non-members who for a green fee were permitted to use the club's golf course, it was trading and was liable to tax in respect of profits attributable to non-members' green fees. In that case Hamilton, J., (at K.B., p. 187, Tax Cas., p. 55) said: ``It is a case it seems to me at the outset in which this aggregate of gentlemen, who may for practical purposes be treated as one person, annexed to their club for the purposes of recreation an enterprise which is separable from it and which results in pecuniary receipts,'' in consequence of which the position was held to be that there was mutuality so far as members were concerned, but not so far as non-members were concerned.

ATC 4157

Lord Wilberforce posed the question: at what point does the relationship of mutuality end and that of trading begin? Many criteria have been considered in the numerous cases where one or another criterion has been regarded as determining or not determining the issue. Lord Wilberforce expressed the opinion that, except in the simplest cases, no single criterion was likely to be decisive. He was of the view that mutuality is not excluded by the fact that some members were corporate bodies or engaged in trade. He said that the relevance of such facts must vary with the nature of the activity, and in the case of social relationships or where recreation is involved the question of whether the relationship is truly one of mutuality, or is rather of a trading character assumes particular significance. At p. 1191, his Lordship then said ``if mutuality is to have any meaning there must be a reasonable relationship, contemplated or in result, between what a member contributes and what, with due allowance for interim benefits of enjoyment, he may expect or be entitled to draw from the fund: between his liabilities and his rights.''

Lord Wilberforce's reference to the requirement that the transaction be mutual emphasises that a particular activity may or may not be undertaken on a mutual basis. In other words, as Mr. Hulme expressed it, one does not categorise a particular activity as mutual or non-mutual. What has to be determined is whether a particular dealing is mutual, rather than that the general nature of the activity under examination is one of the kind the association was designed to foster. If it so happens that outside the social aspect of a club, as in the Carlisle and Silloth Golf case, there is the provision of facilities of which members and non-members may avail themselves, the particular dealing with a member in relation to the use of the facility, even at a charge, may well be a mutual dealing, whereas the particular dealing with a non-member would not be a mutual dealing. Conversely, as English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income Tax, Assam (1948) A.C. 405, illustrates, a dealing between an association and one of its members, may turn out to be, when analysed, a non-mutual dealing.

The circumstance, as will later appear in this judgment, that non-members received the benefit or had the use of some of the services provided by the appellant, was, it was said, not the material consideration because, to quote the words of Lord Macmillan in
I.R. Commrs. v. Ayrshire Employers Mutual Insurance Association Ltd. (1946) 1 All E.R. 637, at p. 640: ``It is not membership or non-membership which determines immunity from or liability to tax, it is the nature of the transactions. If the transactions are of the nature of (in this case) mutual insurance, the resultant surplus is not taxable whether the transactions are with members or non-members... There is nothing to prevent a mutual insurance company entering into a contract of mutual insurance with a person who is not a member of the company.''

If the transaction be mutual, then it would seem that it is immaterial whether that transaction is with a member or not, for if there be a mutual transaction between an association and a non-member the non-member may be regarded pro tempore as in effect a member of a somewhat wider organisation involving himself and the association; but for that to happen the necessary element of mutuality must be present, i.e. contribution to, and, if a surplus, entitlement from, the common fund; that is, there must be complete identity between the contributors and the participators. To the extent that the organisation deals with or extends its facilities to non-members, then to that extent the element of mutuality is missing (Municipal Mutual Insurance Co. Ltd. v. Hills (Inspector of Taxes) (1932) 16T.C. 430, 440; Carlisle and Silloth Golf Club v. Smith (1912) 2 K.B. 177; (1913) 3 K.B. 75), unless there is the right in the non-members to share in a surplus, if any (cf. per Lord Macmillan in the Ayrshire Employers case, loc. cit.). Where the activity is mutual, the fact that some members only take advantage of the facilities available does not affect the element of mutuality (National Association of Local Government Officers v. Watkins (1934) 18 T.C. 499). There may also be mutual trading between an association and its members, and it should not be thought that Lord Wilberforce's query as to the point at which mutuality ends and

ATC 4158

trading beings inferred that mutuality and trading were necessarily exclusive of each other (
New York Life Assurance Co. v. Styles (1889) 14 App. Cas. 381; 2 T.C. 460;
Cornish Mutual Assurance Co. Ltd. v. I.R. Commrs. (1926) A.C. 281 at pp. 286, 287; 12 T.C. 841, 864, at pp. 866, 867).

With the foregoing considerations of law in mind, I turn now to the facts relevant to these appeals. For several years before 1968, the Commissioner and the appellant had been in agreement as to the basis on which the income of the appellant was assessable. That basis is irrelevant to these appeals because for the year ended 29 February 1968, the Commissioner proceeded to assess the appellant on a different basis, and this led to the first appeal. Again, for the year ended 28 February 1969 the Commissioner assessed on the new basis, and for the year ended 28 February 1970 assessed on a basis not acceptable to the appellant. It is sufficient to say at this stage that I consider that, in respect of each of the three assessments involved, it is probable that when calculations are made anew on a basis appropriate to my findings, the appellant will have discharged the onus imposed on it by sec.190(b) of proving that the assessments already made by the Commissioner were excessive. The extent of such excess I am unable to say. On this account, I cannot at this stage make any final order, and I shall indicate later the order which I propose to make under sec.190 of the Act.

In essence, the appellant claimed that the principle of mutuality applied to the whole of the appellant's activities excluding only its investment and rental activities. It was submitted that, with those exceptions, the activities were of a mutual character in that they comprised exclusively, subject only to few very minor exceptions, dealings between the appellant and its members and that those dealings were on a mutual basis. The legal consequence, so it was submitted, was that none of the revenue of the appellant (other than interest and rents) was assessable income, and, accordingly, any surplus resulting from its activities in each year was not income and therefore not taxable.

At the outset, I think I should say that in my opinion the principle of mutuality does not bestow its blessing on the whole of the appellant's activities as was contended by its counsel. It has application to some aspects of the appellant's activities, as I shall endeavour to show. The alternate submission by the appellant was that if the doctrine of mutuality did not apply to the whole of the appellant's activities then it applied to none, and the whole of the appellant's activities were in effect trading or business and for income tax purposes they were to be treated as such. The explanation for those completely opposite submissions is, of course, evident: if the principle of mutuality applied to all the appellant's activities then the appellant would have no assessable income; whereas if the principle had no application, the appellant would have the benefit of the operation of sec. 51 of the Income Tax Assessment Act whereby it would be entitled to have set off against its assessable income from all sources the very substantial losses which it sustained in several of its activities, thereby reducing to a relatively small amount its taxable income in the relevant years.

I do not consider that only one or other of these alternatives is applicable. In this case, the appellant appears to have engaged in numerous activities, some mutual, some not, and I think that the cases already referred to make it clear that such a situation can exist. In earlier cases, perhaps, there has not been the complexity or diversity of activities revealed in this case; but these circumstances do not alter the principle as I understand it, though they may tend to cloud the issues. I think what has to be done is to look to the realities of each of the activities in respect of which there is a dispute, and then to determine whether it or part of it partakes of the required quality of mutuality. Just as some of the activities of the one organisation may be mutual and some not, so also some dealings in relation to an activity may be mutual and some not (Carlisle and Silloth Golf Club v. Smith (supra)).

The services or activities provided by the appellant may conveniently be described under the following headings -

There are some additional activities of a minor nature on the fringes of the ten main services I have enumerated. Their particular classification as mutual or not will be apparent from what I have to say in relation to the main services, which I propose to deal with individually and to indicate my view as to how in principle they should be treated.

The road service involved a variety of services available to members, such as emergency service on highways, towing, pilot or escort services. This was a major service which evidently was conducted at a loss, for it was free to members whenever required and its cost was met out of membership fees. It was not revenue producing. Payments for such services as towing beyond a distance of five miles generally, but not entirely, rendered by contractors to whom the towing charges were paid, or for the escort or pilot services rendered, were not assessable income, being payments by members for the additional services rendered, to which they were entitled, in the same way as club members were entitled to meals for which they paid in the ``house'' or the Country Club.

During the relevant years the appellant conducted a driving school, tuition in which was available to all members, and to members of the family of a member and to persons not members. A necessary qualification for membership of the appellant was that the member bona fide should own a motor vehicle or be a licensed driver. It is not surprising that only 2% of those enrolling at the driving school were members of the appellant. The remaining 98% were made up of 78% who are members of a member's family, and 20% who were not members or related to a member. Non-members, as well as paying for driving instruction, also paid a fee and they were termed holding members. The Articles of Association of the appellant did not deal with holding members but they authorised the council of the appellant to create additional kinds of members and prescribe their rights, and by laws of the appellant deal with the fees payable by holding members. It was said that non-members utilising the driving school paid their holding fees and therefore became members, but with limited rights, and it was submitted that they were members enjoying the benefits of mutuality, though their rights were for the time being limited. Inadequate information concerning holding membership was before me during the hearing of these appeals, but the parties have since agreed upon submitting for my consideration additional material relating to holding membership, namely, a copy of minutes of the council of the appellant dated 29 April 1964, containing a resolution to create holding membership, and the limitations on such class; an R.A.C.V. service handbook current in 1968 and 1969 describing holding membership, and a copy of the form of application for driving school membership now used. The resolution was to the effect that holding membership was available to members of all categories and provided that a member could, on his written request, become a holding member at the expiration of his then current year of membership. The resolution then provided that a holding member was to have the same rights as a service member to the use of the testing, towing, travel and driving school services and be entitled to be a subscriber to the official journal but was to have no other right privilege. It is evident, and this is borne out by the handbook, that holding membership was available at a reduced fee to members who were not possessed for the time being of a motor car and accordingly did not require to have available the valuable road service and so paid a reduced fee. Holding membership was not available to non-members. Though it appears that non-members, upon enrolling with the driving school, paid a fee of the same amount as the holding fee, such non-members did not have any rights of membership. The result was that in the relevant years approximately 2% of the users of the driving school were members of the appellant, and 98% were non-members. Since neither the member of a member's family (himself not a member) nor a non-member could become a holding member the principle of mutuality did not

ATC 4160

apply. What happened was that the appellant was conducting a business activity which was available to all comers upon payment of a preliminary enrollment fee and payment thereafter for each individual driving lesson. Though conducted at a loss the driving school was a trading activity, and it was not (except as to 2% who were members) a mutual activity, and though for the years in question the driving school was run at a substantial loss, it is fairly evident that it was a valuable adjunct of the appellant in the recruitment of members.

During the relevant years the appellant published each month except in January a journal called ``Royalauto'', for the benefit of its members. This journal, as well as containing general editorial material and articles which were designed to publicise the various activities of the appellant, also contained a large quantity of commercial advertising. The journal was published at a substantial loss. Both parties were in agreement that the journal could properly be regarded as a mutual activity, a service provided to members, but they differed as to how the revenue received from the commercial advertisers was to be treated. The Commissioner contended that the revenue received from the commercial advertisers was assessable income, but he was prepared to allow as a deduction the same amount as the cost of printing the advertisements. As already mentioned, the appellant sought to argue that the whole of the appellant's activities were not mutual, but that if that were not the case, then the journal was a trading activity and the whole of the loss on the journal was deductible.

It seems to me, so far as the commercial advertisements are concerned, that the appellant was in business for the purpose of selling space to the advertisers. No doubt it did so for a number of reasons, two of which probably were (1) to provide for its members information about motor accessories and other articles which were available to be purchased, and (2) to enable it to produce for its members a larger and more imposing journal than it would have been without the advertisements. This did not, however, to my mind alter the nature of the transaction so far as the advertisers were concerned. No figures were given in evidence as to the cost to the appellant of printing of the advertisements but it is most unlikely that the appellant would have obliged advertisers by printing their advertisements at a loss, and the strong probability is, I think, that the revenue from advertisements exceeded the cost of their printing. The concession which the Commissioner is prepared to make removes any basis on which tax may be assessed in relation to the journal, and the loss sustained in printing the journal is, in my opinion, a loss sustained in providing a service for members on a mutual basis.

The service provided by the touring department was also free to members. The department made available to members on request a great variety of information concerning road conditions and touring conditions and facilities. The assistance afforded members included the free supply of road maps and, for a small charge, probably less than the cost of compiling them, books containing detailed information about hotel, motel and other accommodation. The touring department earned no revenue. The principle of mutuality obviously applied to it. If any commissions were received by the appellant from hotels or other establishments such commissions would, I consider, be assessable income as they would be received pursuant to commercial contracts with the hotels or other establishments, and such contracts would be trading activities. If the cost to the appellant involved in a member or members of its staff recommending accommodation and such recommendation earned a commission, then pro tanto, the cost involved would be an allowable deduction. The evidence did not enable any calculation to be made and the cost involved might well have been minimal. The difficulty of placing a value on incidental activities of the staff of the appellant is one of the substantial problems in this case and will be discussed later.

The travel department was a separate entity. This department, during the three years in question, was run at a loss. It was set up to provide travel information for members who were interested in travel within Australia and overseas. Its facilities, so far as travel within Australia was concerned,

ATC 4161

appear to have been limited to providing service only to members of the appellant. This was purely a member service and had no source of income. It was said both in relation to the touring department and the travel department that the maps and other touring and travel literature given out by the appellant contained commercial advertisements. If such advertising brought in revenue, it could not, of course, sensibly be said that the cost of printing and distributing the maps and other literature with advertisements on them was incurred for the purpose of earning the advertising revenue, and was therefore to be treated as an allowable deduction from the advertising revenue which was to be treated as assessable income. It is most probable that the net result of printing the advertisements was a profit to the appellant, for it is most unlikely that the appellant would allow itself to be out of pocket for the benefit of the advertisers; but, as in the case of the ``Royalauto'', it seems appropriate to regard the revenue from such advertisement as canceling out the cost of printing the advertisements.

The other travel service provided by the appellant was in respect of overseas travel. This service was available to members and non-members alike. No charge was made to the person who availed himself of this service, but the appellant received commissions from airlines, other carriers, hotels and the like when bookings were made through the appellant. There existed an international organisation named International Air Travel Association (I.A.T.A.) accreditation to which the appellant was seeking. Such accreditation was a very valuable asset, because on becoming accredited very lucrative commissions would become available. In order to obtain such accreditation with I.A.T.A. it was necessary that travel agencies be available to all persons, not merely a limited class of persons such as members of the appellant; and the appellant had, in effect, to prove itself before it obtained I.A.T.A. accreditation.

I do not consider that there was any element of mutuality in respect of the overseas travel service. The income received was in the form of commissions for taking or arranging booking. No charge was made to members or non-members, but the cost of maintaining the service was necessarily incurred in earning the income from commissions and is in my opinion a proper deduction. The circumstance that in the years in question the travel department was run at a loss is not material.

The technical and testing department was available to members. Depending upon what work was undertaken on behalf of a member, either no charge was made or a charge to some extent commensurate with the work was made. This department was run at a substantial loss. It was a service available only to members. Members were entitled to reports on cars which were examined and tested by the appellant's technicians, though it may be that a prospective vendor seeking to sell a car to a member would pay for the inspection and testing of the car. I am of opinion that this was a mutual dealing with members. The charges made to members who required more than standard service was not assessable income, and the losses sustained in conducting this department were not deductible.

The most substantial source of revenue of the appellant, apart from membership fees, came from commissions paid to it by an insurance company, called Club Motor Insurance Agency Pty. Ltd. (herein called ``Club Motor''). During the years in question, the appellant received from Club Motor a net 8½% commission on all comprehensive motor car insurance effected by Club Motor, and 3½% commission on all compulsory third party insurance effected by Club Motor. There was a longstanding agreement between the appellant and Club Motor whereby Club Motor would allow a discount or rebate of 23½% on all comprehensive policies, the policy holder getting the benefit of 15% and the appellant a commission of 8½%. The consideration for such commission was that the appellant would use its efforts to channel comprehensive insurance business to Club Motor, which undertook that it would not insure comprehensively anyone who was not a member of the appellant. In relation to compulsory third party insurance Club Motor was not able to be so selective. If it wished to engage in third party insurance as

ATC 4162

an authorised insurer under the Motor Car Act, it had to be available to all comers. Originally, Club Motor had paid the appellant 5% commission on each third party policy issued to a member of the appellant, but subsequently, and in the years in question, a commission of 3½% on all third party business was paid, such percentage being calculated as equivalent to 5% on third party insurance business done with members of the appellant. The appellant incurred expense in its efforts to channel insurance business to Club Motor.

It was submitted on behalf of the appellant that the insurance aspect of the appellant's activities was really a mutual transaction, that the members' money went to pay for policies and the commission paid to the appellant was members' money which was coming back into a common fund. I cannot see the matter in that light. In my opinion this was a trading activity, both as to the comprehensive insurance and the third party insurance. Both commissions were being paid by Club Motor, an insurance company, for services rendered to it by the appellant. Whether the members paid their premiums direct to Club Motor or to Club Motor via the appellant, there was no payment by members into a common fund in the relevant sense. Nor were members paying for a mutual service to be rendered by the appellant. What they were paying for was insurance by Club Motor; each member entering into an individual commercial contract with an insurance company, albeit on advantageous terms. The fact that the channel of the premiums may have been through the appellant and that insurance at a preferential rate was available from Club Motor are irrelevant considerations. Moreover, the payments by Club Motor to the appellant were not payments by a member to a common fund. There is no element of mutuality present in the arrangement with Club Motor. It is a business transaction, pure and simple, which had the fortunate effect in the years in question of providing the appellant with a large assessable income. The cost to the appellant of earning this income is a deduction, to be discussed later.

The appellant also received a substantial income by way of commission from a finance company called C.A.G.A. The appellant provided staff and facilities for its members who sought to obtain finance from C.A.G.A. for the purchase of motor cars and other purposes. The position in relation to commissions from C.A.G.A. is in my opinion the same as in the case of the commissions from Club Motor. The payments received from C.A.G.A. were assessable income from a business venture; the cost of the services necessary to obtain this income would be deductible.

It was not disputed by counsel for the appellant that if the whole of the activities of the appellant were not mutual, then the principle of mutuality did not apply to rent which the appellant received from tenants and interest which it received on certain investments.

There was considerable evidence and argument before me concerning the branches which the appellant conducted both in the metropolitan and country areas. Most of the facilities available from the head office were available at the branches, and the essence of the dispute before me was the proportion of

ATC 4163

the time spent by the branches on the several services. The appellant contended that 70% of the time was spent on insurance business, and 10% on each of three other activities, namely finance, travel and membership matters.

It is, I think, unnecessary for me to analyse the evidence. Precision is not possible on the material before me, but an estimate of 65% for insurance, 1% on travel, 4% on finance and 30% on membership and other miscellaneous matters would, it seems to me, be a fair estimate. The Commissioner contended that 30% for insurance was the appropriate figure. I cannot accept such a figure. The time spent on insurance at the branches was in my opinion very much more substantial. At the head office, insurance matters were generally referred across the road to Club Motor, but at the branches a large amount of work which in the city would have been referred to Club Motor, was done by the appellant's staff at the branches.

I have dealt with what I consider to be the primary question involved in these appeals, namely, the applicability of the principle of mutuality to the several activities of the appellant. I am of the opinion, as already expressed, that if assessments in respect of the years in question were made which took into account my foregoing conclusions as to the several activities of the appellant, such assessments would be lower than the assessments under appeal, though to what extent it is impossible for me to say. This impossibility is further compounded because of the secondary aspect of these appeals as to which evidence and argument were directed, namely, the appropriate method of accounting in respect of the costs and expenses of conducting the several activities of the appellant, or to express it in the language of sec. 51, the losses and outgoings to the extent to which they were incurred in gaining or producing assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

The financial affairs of the appellant from an income tax point of view assume considerable complexity because of the circumstance that some or its activities are mutual and some are not, and yet it is the one composite organisation that is involved in the rendering of both the mutual and non-mutual services, some of which are revenue producing and some not, but all costing money to conduct. Irrespective of whether the principle of mutuality applies to a particular activity, the revenue attributable to each of the particular activities is readily ascertainable. The ascertainment of the cost of conducting such an activity, or more precisely the losses and outgoings, may, however, be quite a difficult exercise. In this particular case the determination of the cost in conducting each activity involves a consideration of a number of heads of expense incurred by the appellant, such as salaries, maintenance, printing, accommodation, and the like. The appropriate apportioning of overall costs between the mutual and non-mutual activities assumes considerable importance in this case. To the extent that any particular activity of the appellant is a mutual activity, the authorities make it clear that the surplus of receipts in any year beyond the costs of conducting that activity is not income. The corollary to that proposition is, of course, that the cost of conducting a mutual activity is not an allowable deduction within the meaning of sec. 51. If a mutual activity is run at a loss, the deficiency may be made up by the appellant from other funds available to it, but no part of that deficiency is a deduction either in respect of the mutual activity or the particular activity or activities, the profits from which have been used to meet the deficiency of the mutual activity. This aspect is important because it is, of course, to the advantage of the appellant to attribute as much of its expenditure as possible to its non-mutual activities so that the assessable income derived from such activities is reduced to the lowest possible figure. In its efforts to do so, the appellant, during the years in question, has sought to debit the non-mutual activities with the cost of the services rendered to it by the appellant's whole organisation on as wide a basis as possible. It was, of course, entitled so to debit the non-mutual activities in respect of any indentifiable cost proper to be charged against such activities, and much of

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the evidence tendered was directed towards showing what such identifiable items were and the amounts involved. I heard a large body of evidence and long submissions concerning the manner in which it was said that the allocation of items of cost should be determined and debited against the several activities. Part of the problem arose because of what may be called the ``cross services'' rendered by one of the activities to another. For example, the vehicles providing road service frequently carried on them advertisements urging insurance through the appellant with Club Motor. The drivers of these vehicles likewise had literature relating to other of the appellant's activities. The cost of painting the insurance advertisement on the vans was said to be a proper debit against the income earned by the appellant by way of commission from Club Motor; and it was said, too, that the drivers of the service vehicles were instrumental in procuring insurance business, and thus the service activity should be credited, or more significantly from the appellant's point of view, the insurance income should be debited with an appropriate proportion of the wages of the drivers of the service vehicles. Again, it was said that the receptioniste or the counter clerk on the ground floor of the head office, who handed to a person inquiring about membership of the appellant a brochure - a panel of which, about one sixteenth of the publication, advertised insurance with Club Motor - was devoting part of her time to the acquiring of insurance commission income for the appellant which should therefore be appropriately debited. The aggregate of these ``cross services'' may amount to an appreciable item which is proper to bring into account but the savouring of each minuscule portion invites the application of the modified maxim De minimis non curat tax. It was repeatedly illustrated during the course of these appeals that even in the world of figures absolute precision is not always possible, and the time spent on seeking absolute accuracy can be out of all proportion to the importance of the point in issue. Previously, the appellant had claimed 2½% of the cost of member services as attributable to insurance. It now claims 5% in respect of the years under review, based on its own estimate and, to my mind, not sufficiently supported. Further analysis may, however reach a higher percentage than 2½% which previously had been acceptable to both the appellant and the Commissioner, and, if established, the appellant should be entitled further to debit the insurance commission income.

I have mentioned the problem of ``cross services'' specifically in relation to the insurance commission income. The same problem exists to a greater or lesser degree in respect of other activities. Though a problem, it does admit of solution by an examination of each head of cost and appropriate allocation. This emerged from the evidence of two ``outside'' witnesses, and I should have thought that it was fairly evident, for, while there may be room for differences of opinion as to particular items of cost, what is involved are principles of accountancy rather than principles of law.

On the evidence which I heard, particularly that of the two ``outside'' witnesses, it seems to me that the ordinary principles of accounting should be applied. The two witnesses to whom I have particularly referred are Mr. Noel Wilfred Buckley, who was called by the appellant, and Mr. Kenneth Conway Keown, who was called by the Commissioner. These two gentlemen were chartered accountants, possessed of high qualifications and great experience, and they were both of the view that the formula which the Commissioner applied to the years 1967-68 and 1968-69, and which is set out on folio 81 of the documents transmitted to the Court, while possibly appropriate in a simple uncomplicated case, was not appropriate in a complex case such as the present. It was equally clear from their evidence that ordinary accountancy principles relating to costing could readily be used to determine the appropriate allocation of expenses for taxation purposes in the case of the appellant. Of course, not all items of cost which are proper to be taken into account in ordinary commercial accounting are allowable deductions, but, broadly speaking, so far as applicable the ordinary accounting principles are, I think, appropriate. What is involved is a consideration of each

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identifiable item of cost, e.g. salaries, stationery, cleaning, etc. and its allocation to the relevant activity. Where a particular item of cost covers more than one activity, e.g. cleaning, then an allocation of the appropriate proportions to the activities concerned is made. If, finally, some residuum of a particular item is left, which does not admit of precise allocation to any activity, it represents what was referred to in evidence as the ``hard core'', and it is distributed between the various activities on a basis which is equitable.

By way of illustration what were referred to as occupancy costs may be briefly considered. The expenditure of the appellant was classified under two headings: occupancy and administration. Occupancy costs were referable to the head office in Queen Street. The ``house'' activities took up 48% of the space used by the appellant in the building; the remaining 52% of the space so occupied was devoted to the other activities of the appellant. Where a defined area was used only for a specific activity, the allocation of the appropriate proportion of occupancy costs is simple. But this is not the case in respect of a substantial part of the 52% of the head office which provided accommodation for a large part of the appellant's staff which to a substantial extent indiscriminately and in varying degrees rendered services in respect of the several activities of the appellant. Thus, on the ground floor at head office the services of the reception staff were rendered for the benefit of membership, insurance, finance, touring, travel and so forth. In any particular instance, the service might be little more than handing out a pamphlet, or answering a query or referring the inquirer to another floor in the building, or across the road to Club Motor offices. So, too, there was the staff which occupied another floor and kept records, opened mail and rendered other similar service in respect of the several activities of the appellant. In each of these and also in other instances where services to more than one activity were rendered, it would be proper to debit each activity with its fair proportion of the cost of the service so rendered. It was said in evidence that since the appellant was conducting a ``labour intensive'' undertaking, an appropriate method of determining the proportions would be to debit an activity with costs, both occupancy and administrative, proportionate to the number of staff employed in that activity. This, in turn, would create the problem of determining what staff or what proportion of the time of each member of the staff engaged in rendering service in respect of more than one activity, was spent on a particular activity. And so the complexities could be developed almost ad infinitum. The point is reached, of course, where good sense takes command and the ``hard core'' of costs unallocated is distributed between the activities in equitable proportions.

In relation to administration costs much the same considerations apply. There are the same problems - simple where a clearly identifiable portion of the staff deals with only one activity; more complex where there are ``cross services'' and some of the staff render services in respect of more than one activity. Again, allocation on the ``labour intensive'' basis would seem appropriate, and, again there is the ``hard core''. On the evidence, it seems to me that the ``hard core'' is a very small amount and no injustice would be done by distributing it in the same proportions as the allocation of the identifiable items.

There may, of course, be situations where the allocation of costs on the basis of area occupied or staff engaged will obviously be inappropriate, and special consideration has to be given to a particular activity, and I mention two which are exceptional. They are the investment and the rental activities. The investment activity returned a gross amount of $58,400, for the year 1967-68. However, evidence was given to the effect that the time spent each year on attending to the appellant's investments amounted only to about forty hours. This time was spent from time to time during the year by a senior executive of the appellant, whose salary at the time was about $3.50 per hour. A generous estimate of both occupancy and administration costs would not exceed $300 to $400 per annum, allowing for some costs in relation to other members of the staff doing incidental work such as recording and

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banking the payments - labours in no way justifying a deduction of $13,500 claimed by the appellant, being 2½% of the total overhead costs. So, too, in relation to the rental activity. This involved the monthly receipt of a rent cheque, its recording and banking and other incidental matters, all of which were done by members of the staff in the course of their multifarious duties. The aggregate of hours spent by the staff upon rental duties would be relatively a very small amount. The proportion of the occupancy costs in relation to the rental activity could, it seems to me, be readily calculated, for the tenant from whom the rent was received was C.A.G.A. which occupied one floor of the head office building. But the total occupancy and administration costs referable to the rental activity would probably be very much less than the 2½% of the total overhead claimed by the appellant.

As I have said, the allocation of costs is more an accountancy problem than a legal one; and I think it would be a wasteful exercise for me at this stage to assume, after I have indicated in general terms what I consider to be the appropriate approach, that there will be disputes about many matters of detail. Indeed, counsel for both parties made it clear that it was not desired that I should reach any conclusions - at least at this stage - as to detail.

Section 199(1) of the Act provides that the Court hearing an appeal may make such order as it thinks fit, and may by such order confirm, reduce, increase or vary the assessment. At this stage, I am in no position to make any final order regarding any of the assessments. Indeed, though I think it unlikely, the application by the Commissioner of my findings in these reasons for judgment may result in an increase in the assessment. I think, therefore, that the order I should make at this stage should be an interim order, directing the Commissioner to re-assess the appellant in respect of the three years in question in the light of my foregoing remarks. Both parties will have liberty to apply to me for further directions and to raise for determination by me any specific question. I should say, however, that any question so raised should be stated with sufficient precision to enable a clear answer to be given to a specific question. I will reserve the question of costs until further order.

 

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