Ipec Insurance Ltd. v. Federal Commissioner of Taxation.

Judges:
Zelling J

Court:
Supreme Court of South Australia

Judgment date: Judgment handed down 4 July 1975.

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Zelling J.: This is an appeal by the taxpayer company from a decision of Board of Review No. 2 dated 15th December, 1972. The Commissioner of Taxation adjusted the taxpayer's income for assessment in relation to the tax years ending 30th June 1967, 30th June 1968, 30th June 1969, and 30th June 1970 by adding to the taxable income as returned by the company in the return lodged by it for each of those tax years, the net proceeds from the sale of shares owned by the taxpayer company and sold by them in each of the tax years to which I have referred. The company objected to the alterations and on its objections being disallowed, appealed to a Board of Review. The Board in its decision upheld the Commissioner's alterations in relation to each of these tax years and dismissed the appeals. From that decision a further appeal was taken to the High Court of Australia and was transferred from the High Court to this Court for hearing and determination.

The evidence which was before the Board of Review was also tendered before me and in addition, the whole of the minutes of the company instead of the extract from those minutes which was used as evidence at the hearing before the Board was tendered as evidence before me. A further fact was admitted after the hearing had closed, namely that the balance of the purchases of shares made by the company between July and September 1965 was not made out of moneys obtained from an issue of shares to the public pursuant to a prospectus dated 5th May, 1965. With those exceptions, the evidence before me is the same evidence as was canvassed before the Board of Review. No oral evidence was called at the hearing before me. I find the facts to be as follows -

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1. The appellant was incorporated as a proprietary limited company on 18th September, 1963. It joined a group of companies operating freight services throughout Australia.

2. In late 1963, shortly after its incorporation, the appellant company issued 156,000 shares of ten shillings each which were taken up by other companies in the group. The paid up capital of the taxpayer company therefore was at this stage £78,000. The capital so raised was invested in shares in 38 companies. All of these shares were in companies listed on stock exchanges. These shares were acquired between December 1963 and January 1964, probably through a stock broker.

3. Until July 1969 the taxpayer engaged actively in the business of a general insurer. Its insurance business did not in fact complete until June 1970 when the last of the current policies of insurance terminated. It wrote most forms of risk insurance other than life insurance. The major portion of its premium income was derived from marine insurance, that is to say, insurance on goods in transit.

4. In 1965 the appellant company converted from a proprietary company to a public company. Pursuant to a prospectus dated 5th May, 1965, it issued to the public 332,000 five shilling shares at a premium of ⅙d. per share. This public issue was fully subscribed. The taxpayer company received therefrom approximately £107,000.

5. The prospectus dated 5th May, 1965 referred to the taxpayer's investments in the following terms -

``Ipec Insurance Limited already has a large portfolio of investments, almost entirely comprising shares in listed Public Companies, and is already deriving income from this source. It is intended to continue to place a large part of the Company's profit into reserves so that these investments may be increased and the Company's position strengthened.''

6. The taxpayer employed part of the money raised by the flotation to the public to acquire from another company in the group shares in nine listed companies and one unlisted company at the then current market prices. According to the list marked ``A'', attached to the minutes of the meeting of the directors of the company held on 15th June 1965, the cost of the purchase of these shares was £42,437.18.6 plus brokerage and stamp duty. The company also used part of that money to acquire the whole of the issued capital of Roadswift Pty. Ltd. Roadswift Pty. Ltd. was a company earning its income from truck repair and maintenance and from truck sales. The company made a further large purchase of shares principally between the months of July and September 1965 at a total cost of the order of £47,000. It is in relation to this purchase that it is conceded by the solicitors for the appellant that the balance of the share purchases made between July and September 1965 were not made out of moneys gained from the public float. I understand by that concession that there was a small amount of public float money available of the order of £4,400 left over from the purchase of the first group of shares but that the balance of the amount, some £43,000 had to come from other moneys of the appellant company. Having regard to the small amount of money shown as net current assets in the prospectus as at 31st December 1964, an amount of £3,452, and to the fact that there is no evidence suggesting that the company accumulated any large capital assets other than from the proceeds of the float, which have already been accounted for, between 31st December 1964 and the purchase of these shares between July and September 1965, I find that the balance of some £43,000 could only have come from the premium income of the company for there is nothing shown on the balance sheet, in the prospectus, or in the evidence of the witness Konstas the secretary of the company who gave evidence before the Board, to suggest any other source from which the purchase price of the shares acquired between July and September 1965 could have been paid, nor is it suggested that such moneys were obtained by loan or overdraft. Indeed the only discussion of arrangements for an overdraft occurs in the minutes of the meeting of the directors on 15th October 1965, after the purchase of the shares to which I have referred had been completed, and the purchase had already been minuted, as is shown by the note annexed to the minutes of the meeting of the directors held on 7th September, 1965.

7. After the public issue the appellant extended its insurance business outside the

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associated group of companies. The risks covered by policies issued by the taxpayer included marine insurance, motor vehicle insurance other than compulsory third party insurance, workmen's compensation insurance, all risks insurance, burglary insurance and fire and public liability insurance.

8. The evidence given was that the taxpayer company ``was a new company within the insurance industry and in order to heighten or gain acceptance of the insurance company within the insurance industry itself, and in order to gain the confidence of policy holders or prospective policy holders it was thought desirable that the moneys received by way of capital from the company would be invested in shares to supplement the income of the company and to add to the importance or the value of the company by the investment of shares''.

9. The first sale of any of the company's shares after it became a public company was a sale of shares in Myer Emporium (S.A.) Ltd. which is referred to in the minutes of meeting of directors of the company of 14th December 1965. The shares were sold at a profit of £980.11.0. The profit made on the sale of these shares was carried to an ``investment realization reserve''.

10. Before the public flotation, shares had been sold by the appellant on the advice of stockbrokers. The proceeds from any such sales were invested in the purchase of shares in other listed companies.

11. The Board of Directors of the appellant company discussed its investment portfolio at most of its meetings. The minutes show that, from time to time, resolutions concerning the purchase and sale of specific shares were passed. By and large however, the day to day administration of the investment portfolio was handled by Mr. George Page Barton (who was a director of the taxpayer company but did not hold an executive position) and later by Mr. Fletcher who was appointed general manager. A number of decisions concerning the policies to be followed in the investment of the company's investments were also taken from time to time and minuted.

12. Before the appellant became a public company re-insurance facilities were not open to it and the investments in shares in publicly listed companies provided readily realisable reserves which would be available to meet large claims if the need arose. After the taxpayer became a public company it was able to limit the amount of its liability on any one claim to $15,000 and the share investments would only have to be realised in the event of there being a large number of substantial excess claims at one time. The taxpayer never had to resort to its investments to meet claims.

13. At its meeting on 15th October, 1965 the Board of Directors resolved ``that the company take up all rights with respect to its investment portfolio as and when they become available''.

14. At its meeting on 1st March, 1966, the Board of Directors resolved that ``due to the recent drop in share prices... we hold on to our present shares''.

15. At its meeting on 20th September, 1966 the directors of the appellant resolved to purchase 3,000 Reid Murray debentures at a total cost of $1,862. This purchase was made on the grounds that the receiver of Reid Murray had intimated in public statements that the return on capital would exceed the market value of the Reid Murray debentures at that time. On 15th October, 1966, the purchase of Reid Murray debentures in the sum of $6,266.32 was ratified, and it was resolved to continue to purchase these debentures until the total sum expended was $20,000.

16. At the meeting of directors held on 15th November, 1966, it was resolved ``not to sell any of the present holdings until better alternative investments could be seen''. Alternative types of investment were discussed, such as ``land investment, sub-division investment'', and it was resolved ``that land be investigated with a view to investment''.

17. The witness Konstas agreed that what was considered was that land would be a ``better'' investment, and when he was asked what was involved in the proposition that land was a better investment, he agreed that it was ``better'' in the sense ``that it was recognized by the Board as a whole that a profit, without knowing exactly how much, could be made from the purchase of that land''.

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18. On about 31st October, 1966, the appellant received a letter from the Deputy Commissioner of Taxation in South Australia asking for details of share transactions in the income years ended 30th June 1964, 1965 and 1966. The reply was dated 26th January, 1967. In answer to a question asking the reason why shares were disposed of in those years the appellant answered: ``The shares were sold to provide working capital to meet various expenditures''. In evidence it was suggested that this answer, given in a letter signed by a person described as ``cost accountant'' and who did not attend Board meetings, was inaccurate. It was said of these sales that - ``In general they would have been as a result of broker's advice''. The witness Konstas who gave this evidence had been secretary of the appellant company since 8th March 1965, and a director since 3rd September, 1969. The Board of Review who saw and heard the witness Konstas preferred the explanation given to the Deputy Commissioner in 1966 to that of the evidence of Konstas above referred to. As I have not seen the witness and no application was made to call him to give evidence before me, I must accept the Board's assessment of credibility on this point.

19. At its meeting of directors held on 21st March 1967, it was recorded that the appellant had acquired sixty per cent of the issued capital of a company called Lindsay Toole & Co. (Wool) Pty. Ltd., for the sum of $38,337. A fee of $5,750.62 was resolved to be paid to a Mr. Neil Ohlsson for his services in this matter.

20. At the same meeting it was resolved that arrangements be made for Lindsay Toole & Co. (Wool) Pty. Ltd. and another company John Allan Ltd. to purchase as tenants in common certain subdivisional land at Bass Hill in another State for the sum of $310,000, one half of which was to be lent back by the vendor by way of mortgage and the remaining funds were to be provided by the appellant. The Board of Review said, in relation to this transaction ``one of the reasons, and it may not be unreasonable to conclude, the chief reason for the taxpayer's acquisition of Lindsay Toole & Co. (Wool) Pty. Ltd. was that it had, as it was put, `losses available' to offset profits which it might make''. Mr. Fisher, who led for the appellant, did not challenge this conclusion of the Board before me.

21. Also at the same meeting, the Board of Directors discussed the acquisition of one half of the issued shares in a merchant banking company, the Martin Corporation. It was felt that the ``merchant banking take-over company area'' as Konstas put it ``was a good investment'' and ``was a good field to be in''. Konstas thought that a yield on shareholders funds of fifteen per centum per annum was contemplated. That proposal did not materialize and at its meetings on the 19th April, 1967 the Board of Directors resolved to invest up to $100,000 in a company to be formed for the purpose of taking over other companies.

22. A company for this purpose called Tjuringa Securities Ltd. was ultimately formed. The taxpayer's investment in a take-over company was made because of the more attractive rate of return on the money so invested than the return it was obtaining from its investment in publicly listed companies.

At a meeting of the Board of Directors on 19th April, 1967 it was resolved that the portfolio be submitted to two firms of sharebrokers for analysis and advice. In fact, written advice was obtained from three firms of sharebrokers and a schedule of brokers' recommendations was prepared. The brokers' recommendation to sell certain shares was accepted and followed.

23. Tjuringa Securities Ltd., the take-over company, was to be funded initially by loans from the taxpayer, and the planned benefit for the taxpayer was to come from any capital appreciation in the shares of Tjuringa Securities Ltd. The taxpayer provided initial working capital for Tjuringa Securities Ltd. up to a limit which had been set of $100,000. The limit was subsequently increased from time to time. Other companies in the group also appear to have contributed in this regard.

24. At the meeting of directors held on 20th June, 1967 it was resolved that each director should bring to the next meeting ``six shares for discussion''. The Board thought that the cross-examination by Mr. Legoe of the witness Konstas before them on this topic was important and I agree. The cross-examination is as follows -

``Why was it resolved that that be done, can you recall? - Well, because of the feeling that the return on that investment wasn't sufficiently high enough or that we were

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dissatisfied with the return. It was thought that a better approach to it would be for each of the directors to do that as a different approach to the investment in publicly listed companies because it was raised at that meeting that since some of us lived in Adelaide and some of us lived in Sydney this might be the better approach.

What was the Board considering in relation to the suggestion of bringing six shares for discussion? - I think the consideration there was to see whether by individual research - each of us individually researching companies - we might not be able to make investments in publicly listed companies that would have a greater yield to Ipec Insurance Co. (i.e. the appellant).

So you were still looking for a greater yield for Ipec? - Yes I would say that at this stage we had not finally agreed to quit the shares listed in public companies, but we were concerned with this.

You were contemplating quitting, as you call it, the shares listed in public companies? - At this stage I would say we were dissatisfied with the yield and were considering ways and means of (a) alternative investments and (b) an alternative method of approach and analysis.

At this stage the company was still carrying on business of general insurance? - Yes.

When you say yield, do you mean the yield to Ipec Insurance by a calculation of what you paid for those shares and what you could get from them at that particular time on the market? - No dividend yield; right of return yield.

And the alternative that was contemplated by the Board was to achieve a higher yield by dividends or interest, from a take-over company or from land subdivision sales? - Yes.

And it was contemplated that that was to be the alternative method of insurance company carrying on its business? - It was contemplated.''

I think that the next question and answer are also of significance though they were not quoted by the Board:

``At that time, that is to say in June 1967 or thereabouts, when the Ipec Insurance would changeover to this other type of business activity to achieve a higher yield from its investments? - It was considering the investments in land and in the take-over company as an alternative to investments it had in shares in publicly listed companies.''

25. During the year ended 30th June, 1967 the appellant sold shares in five different companies in accordance with the recommendation of one or more of the sharebrokers advising them. The sale of all these shares resulted in a net gain of $2,538 which was carried to the investment realization reserve account.

26. At its meeting on 22nd August, 1967 the Board of Directors resolved to purchase shares in two companies: Yorke Motors Ltd. and Harden & Johnston Ltd. Both of these companies were motor dealers and because the motor trade was at a low ebb, it was felt they represented good take-over prospects.

27. At the meeting on 14th October, 1967 the general operating procedure for handling the investment portfolio was discussed and it was resolved that -

``(i) future investments where practicable should be for a minimum of $2,000;

(ii) that the portfolio be reviewed monthly;

(iii) Mr. Fletcher produce and table for the next Meeting a stop loss system which is to be operated;

(iv) two or three brokers should be consulted for purchases and sales and their recommendations taken into consideration.

The brokers nominated were: -

   A.B.S. White & Co.
   Taylor & Collison
   A.C. Good
          

(v) the General Manager have power to sell and buy shares and to act independently when opportunities or occasions warrant this.''

28. The ``stop loss'' system, referred to in placitum (iii) of the above resolution, was in fact adopted. The striking feature of that system for present purposes is that the basis of it was that each share held should have a price fixed against it arrived at by nominating a figure ten per cent below its then market value, and that shares that fell below this ``stop loss'' figure were to be discussed as a matter of

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urgency. The stop loss system was therefore not geared to the original cost of the share.

29. It was submitted that the adoption of the ``stop loss'' system was an indication that the taxpayer was not trading in shares and that the system was designed to preserve the capital of the company by minimizing possible losses. Under cross-examination on what was sought to be achieved by the operation of this system, the witness Konstas answered: ``It certainly was there to minimize loss and presumably if one minimizes its loss it maximizes its profit and you can't have one without the other, I don't think''.

30. At a meeting of directors held on 19th December 1967, it was resolved to sell a number of shares including several industrial leaders and to buy shares in four companies, including Yorke Motors Ltd. and a very low yielding industrial leader. The shares sold were mostly sold at a loss. It was said that those bought were bought because they presented ``a better investment than those sold''. Asked what he meant by the word ``investment'' in the context, the witness Konstas replied: ``By purchasing shares on the Stock Exchange the aim was to protect the shareholders' funds of the company and invest in stocks which would give a reasonable rate of return and reasonable security of moneys invested''.

31. At a meeting of directors on 20th February, 1968 Fletcher reported ``net loss situation on investment realization up to that date of $6,200''. The minute then continued -

``The general market situation was discussed. It was considered that there was a real likelihood that the present prices might soon fall sharply, particularly if (as seemed possible) the British budget imposed further restrictions on investment in Australia. It was agreed that in the circumstances (and also having regard to other opportunities for investment which might shortly become available) it would be prudent to liquidate the present holdings (with some exceptions).

Sale of portfolio to commence immediately and funds to be invested in the short term money market.''

The exceptions were the shares in East-West Airlines Ltd. and in Yorke Motors Ltd. and the debentures in Reid Murray Ltd. The reasons for the retention of the shares in the airline company were that the return on investments was quite reasonable and because of a prior association with that company. The purchase of land for subdivision was discussed as an alternative to investment in shares in public companies.

32. During the second year of income under review (year ended 30th June, 1968) the entire holding of the appellant (with three small exceptions) was sold on the Stock Exchange pursuant to the resolution of the Board of Directors referred to in the last preceding paragraph. Shares in twenty-four companies were sold at a net gain to the taxpayer and shares in thirty-nine companies were sold at a net loss. The overall gain to the company on the realization of its investments was $81,726.89 which was carried to the Investment Realization Reserve Account.

33. Out of the proceeds of sale of the appellant's portfolio the appellant invested $258,360 in the purchase of 500,000 shares in Direct Acceptance Corporation Ltd. which company then was in the process of being taken over by Tjuringa Securities Ltd.

34. Direct Acceptance Corporation Ltd. was a finance company. The return to the appellant from this investment was by way of dividend income. This return proved to be approximately the same as the dividend return from the portfolio. The dividends received from the whole portfolio in the year ended 30th June, 1968 totalled $19,941. In the following year the appellant received $18,697.57 in dividends from dividends in Direct Acceptance Corporation Ltd. It was also contemplated by the Board of the appellant that Direct Acceptance Corporation Ltd. would provide a ``fringe'' benefit in the form of additional insurance business.

35. The purchase of shares in Direct Acceptance Corporation Ltd. was ``ratified'' at a meeting of directors on 23rd April, 1968. At the same meeting there was a discussion relating to the acquisition of a piece of property which adjoined the subdivisional land at the interstate site previously referred to.

36. In July, 1968 the appellant assisted Tjuringa Securities Ltd. in the purchase of 90,000 stock units in H. Beecham & Company Limited which company Tjuringa Securities Ltd. was then taking over. Under the arrangement between Tjuringa Securities Ltd.

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37. During the third year of income under review (year ended 30th June, 1969) the appellant's shareholdings in Yorke Motor Holding Ltd. and United Holdings Ltd. were sold. In both cases the reasons which prompted the appellant to purchase the shares, viz. the possibility of take-over, had disappeared. The shares in Yorke Motor Holding Ltd. realised a gain of $10,233 and the shares in United Holdings Ltd. realised a loss of $4,341. This loss was not claimed by the appellant as a deduction but it was allowed by the Commissioner as such. The net result of these two transactions was carried to the Investment Realization Reserve Account.

38. In July, 1969 the insurance business of the appellant was transferred to a subsidiary company.

39. During the fourth year of income under review (year ended 30th June, 1970) the appellant sold 1,800 shares in S.A. Barytes Ltd. for a net gain of $793, which amount was carried to the Investment Realization Reserve Account. The appellant was the underwriter to an issue of shares in this company.

40. The appellant was assessed on profits arising out of the sale of shares in each of the four years ended 30th June 1967, 30th June 1968, 30th June 1969 and 30th June 1970.

41. In respect of the two latter years the appellant was also assessed on the difference between the cost price of debenture stock in Reid Murray Acceptance Limited and amounts received by way of repayment of the debentures. It was conceded during the course of the hearing before the Board that no argument would be advanced against the assessability of the net profits derived in relation to Reid Murray Acceptance Limited and no such argument was advanced before me.

42. Particulars of the amounts which the Commissioner included in the assessments are as follows -

• (a) Year ended 30th June, 1967: Net proceeds from sale of investments - $2,538.
• (b) Year ended 30th June, 1968: Net proceeds from sale of investments - $81,726.
• (c) Year ended 30th June, 1969: Profit in sale of shares in Yorke Motors Holding Ltd. - $10,233.
• (d) Year ended 30th June, 1970: Surplus on sale of shares in S.A. Barytes Ltd. - $793.

43. The appellant lodged objections against the assessments. The grounds of its objections to the inclusion of the amounts referred to are as follows -

``(a) That the said amounts, nor any part of them, are -

• (i) profit arising from the sale by the taxpayer of any property acquired by the taxpayer for the purpose of profit-making by sale or,
• (ii) profit-making from the carrying on or carrying out of any profit-making undertaking or scheme,

and that the said sums, nor any part of them are assessable as income under or by virtue of sec. 26(a) of the Act.

(b) That the said sums, nor any part of them are income by virtue of any other provision of the Act or according to ordinary concepts or otherwise.

(c) With respect to the amounts included in the assessments for the years ended 30th June 1968, and 30th June 1969 (viz. $81,726 and $10,233 respectively), that the investments which were sold in those years were sold in the course of realising assets for the purpose of reinvesting in other assets and not in the process of carrying on or carrying out any profit-making undertaking or scheme.''

44. The assessments were not sought to be supported under either limb of sec. 26(a) of the Income Tax Assessment Act. The Commissioner relied both before the Board of Review and before me upon the provisions of sec. 25(1) of the Act.

On these facts the arguments submitted both on behalf of the appellant and the respondent before the Board of Review were based first on a dissection and categorization of the facts and secondly on a discussion of a number of cases relating to the activities of insurance companies in which the profits of dealings in shares had or had not been treated as income and therefore assessable or not in the hands of the insurance company concerned. The Board in its reasons rejected this approach and said at para. 57 and 58 of their reasons -

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``57. In our opinion the case is not to be decided by reference to the insurance company cases. The parties to the references tended to conduct the combat as if the question were whether or not the facts of the case were to be categorised as an `insurance company investment' case. Our own firm conclusion is that the taxpayer company was most unlike a conventional insurance company of any description. It was seemingly originally formed for the purpose of gathering up the insurance business that naturally becomes attached to the conduct of a freight business. In fact we had very little evidence indeed of its formative period and if the activities of later years are thought to be, in these reasons, unjustifiedly colouring the activities of the taxpayer in the first twenty months or so of its existence then the taxpayer has only itself to blame.

58. The fact is that at least from the time at which the taxpayer became a public company it involved itself not only in insurance business (which it in fact gave up in 1969) but in a range of activities embracing the entry into, or contemplation of the entry into, merchant banking, land development, hire purchase finance, and investment in various stocks. A reading of the full minutes of Board meetings suggests the presence of an anxious seeking after any profitable dealing that might conceivably be fitted into the taxpayer's structure. In the circumstances, it is difficult to categorise the taxpayer's `investment' activities as anything but one aspect of its wide ranging business operations.''

They then went on in the next paragraph to consider various factors which in the mind of the Board supported the conclusion to which they had come and went on in para. 60 and 61 of their reasons as follows -

``60. On the whole we are clearly of opinion that the taxpayer was, at least from the date of the public issue in 1965, carrying on a conglomerate of commercial activities involving all the features which we have mentioned and that its share portfolio constituted one of the tools which it had ready to hand to be used or disposed of as the occasion demanded.

61. On this basis of reasoning the submission... that the sale of almost the whole portfolio in 1968 `was not a sale in the ordinary course of a switch of investments but amounted to a change in activity by the taxpayer' must fail, for it is based on what we regard as the main fallacy of the taxpayer's case, namely that it was simply an insurance company with an investment portfolio. Long before this, in our view, the activities of the taxpayer had been much wider than, and different in character from, a company organised on such a basis. If there was a `change in activity', that change had occurred well before this time.''

In the result therefore the assessments were confirmed and the appeal was dismissed.

When the matter came before me Mr. Legoe took a preliminary objection that the appeal to this Court was based on a question or questions of fact and accordingly by reason of the provisions of sec. 196(1) of the Income Tax Assessment Act was incompetent.

If I had been in agreement with the Board's finding that the taxpayer was at least after 1965 carrying on not just one business but a congeries of businesses there might have been something to be said for Mr. Legoe's objection. In my opinion the evidence does not bear out the Board's finding on this point for reasons which I will canvass in greater detail when I come to deal with the appeal. I think that the company was only carrying on one business, that of insurance, and the real question was whether its dealing in shares which produced a profit in each of the tax years in question in this appeal was or was not ``income'' within the meaning of sec. 25 of the Income Tax Assessment Act. I think with respect that the judgment of Fullagar J. in
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at 51 exactly covers the point in this case -

``There are decisions in taxation cases, including decisions of the House of Lords, which, to my mind, create serious difficulty in relation to the distinction, which often has to be drawn, between `questions of fact' and `questions of law'. For present purposes, however, I think it sufficient to refer to what was said by Lord Parker of Waddington in
Farmer v. Cotton's Trustees (1915) A.C. 922, in a passage quoted by Latham C.J. in
F.C. of T. v. Miller (1946) 73 C.L.R. 93 at p. 97. His Lordship said: - `The views from time to time expressed in this House have been far from unanimous,

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but in my humble judgment where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only'. (1915) A.C. at p. 932. With the greatest respect, this seems to me to be the only reasonable view. The distinction between the two classes of question is, I think, greatly simplified, if we bear in mind the distinction, so clearly drawn by Wigmore, between the factum probandum (the ultimate fact in issue) and facta probantia (the facts adduced to prove or disprove that ultimate fact). The `facts' referred to by Lord Parker in the passage quoted are the facta probantia. Where the factum probandum involves a term used in a statute, the question whether the accepted facta probantia establish that factum probandum will generally - so far as I can see, always - be a question of law. Mr. Lush relied on F.C. of T. v. Miller (1946) 73 C.L.R. 93. Special considerations may apply to the word `resident', which was in question in that case. But in any case, in the `absence of unanimity' to which Lord Parker referred, I consider myself free to give effect to a view which seems to me to be clearly right. In my opinion, the decision of the board involves a question of law, and the appeal lies. See generally
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1933) 49 C.L.R. 171 at p. 175.''

In my opinion the factum probandum, the ultimate fact in issue here, involves the construction of a term used in a Statute, namely ``income'' as that word is used in sec. 25 of the Income Tax Assessment Act and the question whether the accepted facta probantia established that factum probandum does in my opinion involve a question of law within the test propounded by Fullagar J.

The question at issue as I see it is not whether certain items in dispute constituted assessable income under sec. 25 within an agreed concept of ``income'' under that section, but whether the whole course of that business took the admitted profits of the share transactions of the company outside the concept of ``income'' in sec. 25, i.e. that sec. 25 on its proper construction did not catch those profits and bring them to tax. That, when the preliminary facts have been ascertained, is a question of law; see also an article by Dr. Spry; Appeals from Boards of Review: Questions of Law in 1 Australian Tax Review pp. 285-288. Accordingly I overrule Mr. Legoe's preliminary objection and go on to consider the appeal on the merits.

In my opinion after considering the findings of fact which I have set out in the numbered paragraphs above and which differ slightly from those found by the Board, because as I have said, further evidence was tendered before me and one further important fact was admitted before me, I find that the company was indeed carrying on the business of an insurance company during all the tax years in question and not ``a conglomerate of commercial activities'' as the Board found. The accounts of the taxpayer company were prepared throughout on the basis of it being an insurance company which held shares. It has been assessed throughout on that basis and the minutes of the company do not in my opinion bear out the finding of the Board that in effect several businesses were being carried on simultaneously by the same company. All the matters referred to in para. 59 of their reasons which deal with changes in investment and the way in which the directors looked after their share portfolio, are in my opinion completely consistent with an insurance company which in its early years needed a substantial share backing to make it an attractive proposition to intending insurers and later required its net income to be as substantial as it could be to enhance the profits of the insurance company.

In deciding this matter I think the following considerations are of importance on the facts -

The original purchases of shares by the company were not simply purchased as a way of investing what Mr. Fisher called the substratum of capital of the company. The investments were purchased for a particular purpose and that particular purpose appears from the evidence of Konstas at p. 19 -

``Could you tell the Board why these shares were purchased by the company? - Ipec Insurance Ltd. was a new company within the insurance industry and in order to heighten or gain acceptance of the insurance company within the insurance industry itself, and in order to gain the confidence of policy holders or prospective

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policy holders it was thought desirable that the moneys received by way of capital from the company would be invested in shares to supplement the income of the company and to add to the importance or the value of the company by the investment of shares.''

The prospectus for the issue of shares to the public in May 1965 provided that the purpose of the issue was to -

``(1) Enable Ipec Insurance Ltd. to acquire the business of Roadswift Pty. Ltd.

(2) Provide funds for further expansion of development of underwriting and investment activities.''

In fact by the date of the issue of the prospectus the appellant company had already acquired Roadswift Pty. Ltd. for a cash consideration of £55,000 and the issue of 156,000 shares at 5/- each which were issued at par and credited as fully paid up. That purchase took place on 8th March, 1965. In cross-examination the witness Konstas said the prospectus was inaccurate in that it should have stated that the first purpose of the issue was to discharge outstanding purchase money owing in respect of the purchase of Roadswift Pty. Ltd. The balance of the moneys appear to have been spent on the second of these purposes, namely the purchase of shares in limited companies which could of course have been sold at any time to provide funds for any expansion of underwriting and investment facilities. Until those funds were required, the obvious course of business in relation to them was to invest the money in one way or another and the directors here invested the money in shares producing dividends.

The shares bought between July and September 1965 were, as it is now conceded, partly paid for not out of the money obtained from the flotation to the public but from other money and as I have said earlier in this judgment there is no indication anywhere in the evidence as to the source of the purchase moneys and the inference must be that the balance of the moneys required for the July to September purchase was in fact provided from the premium income of the company.

The close and careful consideration by the directors at meeting after meeting, of the share portfolio of the company and the buying and selling transactions in relation to that portfolio, show clearly to me that those activities were part of the business of the appellant so that it could turn the money of the company to the best advantage of the company in enhancing its profits and providing the best use for the shareholders' money.

On inspecting the profit and loss accounts of the company annexed to the returns submitted to the Commissioner of Taxation, the profit and loss accounts for the years ended 30th June, 1967 and 30th June, 1968 do not segregate the income derived from insurance and the expenses of deriving that premium income from other income expenses (including dividends from companies) and the expenses of earning that income. The premium income and other income are added together first to produce the total income and then all the claims and expenses are deducted as one lump sum and a net profit produced on the whole of the activities of the company. I have no doubt that that method of accounting correctly shows how the company functioned. Premium income and share income were all alike part of the revenue structure of the company and all alike available to meet claims and expenses. The first segregation appears in the profit and loss account for the year ended 30th June, 1969 but it may be remembered that by then the largest part of the shares of the company had been sold.

In considering the question of law thus thrown up by these facts I start from the general proposition contained in the joint judgment of Latham C.J., Dixon and Williams JJ. in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 at 618 where their Honours said -

``The sounder view is that profits and losses on the realisation of investments of the funds of an insurance company should usually be taken into account in the determination of the profits and gains of the business.''

In my opinion what the evidence shows in this case is that the appellant from time to time changed its investments to use its funds to the best advantage and it did that in the ordinary course of carrying on its business. It follows from that, as Menzies J. said in
Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502 at 509 -

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ATC 4148

``What it makes or loses in doing so is, I think, properly to be regarded as something to be taken into account, together with the intermediate income, in deciding whether, overall, the investment produced a profit or a loss. Any profit realised on sale is of the same character as the annual income, and both go to make up the return.''

Mr. Fisher sought to distinguish this case by relying on the judgment of Kitto J. in
The National Bank of Australasia Ltd. v. F.C. of T. 69 ATC 4042; (1969) 118 C.L.R. 529 but his Honour's recital of the facts at pp. 4047-8 shows that the National Bank case does not assist this argument. His Honour said -

``The National Bank when buying all the premises in which the Queensland National Bank had carried on its business must have had in mind that some would be likely to prove redundant sooner or later and would need to be sold, but they had to be bought at the time if the goal of stepping into the Queensland National Bank's shoes was to be pursued. In exactly the same way the shares had to be bought, even if ultimately they should be sold as no longer required, for otherwise the desired appearance of complete continuity of business, as well as the collateral advantages, would have to be forgone. Both that appearance and those advantages may be subsumed under the general head of goodwill, for their nature was of that kind. The purchase of the shares bore no resemblance to an investment of banking funds, made to earn income pending a need for their deployment in the making of advances and the like; it bore no resemblance to an investment by way of erecting a second or third line of defence against a time of stringency or emergency. It was an acquisition, not of the kind that might be repeated in the course of the profit-earning process, but made once and for all for the sake of enhancing, even if only for the time being, the profit-earning potential of the enterprise as a whole.''

The share activities of the appellant in this case on the other hand were pursued to earn income. The shares themselves were, certainly in the earlier years, a line of defence against a time of stringency or emergency and the share portfolio was part of the general trading activities of the company. Further it was not a ``once and for all'' transaction, it comprised a whole series of transactions repeated over most of the life of the company after it became a public company in 1965. Accordingly, the National Bank case is not an authority in favour of Mr. Fisher's proposition and the careful delimitation of the two types of case by Kitto J. in the passage I have referred to tells against Mr. Fisher's argument and not in favour of it.

My view can be well summed up in the words of Helsham J., spoken in reference to an investment company, in
London Australia Investment Co. Ltd. v. F.C. of T. 74 ATC 4213 at 4228 where his Honour said -

``In my view, the taxpayer has not shown that the buying and selling of shares was no more than an incident in the business of producing dividends from investment in capital assets, something in the nature of a realization or change of investment only. Rather has it been shown that the activities of buying and selling were done as part of the business of the appellant in order to use to best advantage the shareholders' money; the profits which arise from such share movements are as much profits of the business as the income is; a layman would describe them in ordinary parlance as business profits of this investment company. So would I.''

In my opinion a similar position obtains with regard to this insurance company. It used its shares in its early years to attract business and in its later years to enhance the profits of the company; it was not merely a case of an owner of an ordinary investment choosing to realize it and obtaining a greater price for it than he originally acquired it at. It is a case of the shares being used in the general business of this insurance company. Accordingly, the distinctions on which Mr. Fisher relied taken from the old case of
Californian Copper Syndicate Ltd. v. Harris (1904) 5 T.C. 159 at 165-166 do not apply to this case. In any event although those observations of the Lord Justice Clerk taken from the Californian Copper case have been frequently cited in judgments of the High Court, the observations in question which are based on and related to the concept of ``adventure or concern in the nature of trade'' in the British Act of 1842 are becoming more difficult to relate to our

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ATC 4149

concept of income in sec. 25 as it has been developed in successive decisions of the High Court. It may be necessary at some stage to re-examine the present relevance of the Californian Copper case to questions arising under sec. 25. Fortunately it is not necessary to do so in the instant case.

The Commissioner was correct in treating the profits obtained from the sale of shares in each of the four tax years as assessable income of the company and accordingly this appeal should be dismissed with costs.