Ostime v Australian Mutual Provident Society
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE JENKINS,LORD JUSTICE PARKER,LORD JUSTICE PEARCE |
| Judgment Date | 04 June 1958 |
| Judgment citation (vLex) | [1958] EWCA Civ J0604-2 |
| Date | 04 June 1958 |
| Court | Court of Appeal |
[1958] EWCA Civ J0604-2
Lord Justice Jenkins
Lord Justice Parker
Lord Justice Pearce
In The Supreme Court of Judicature
Court of Appeal
MR JOHN PENNYCUICK, Q.C., and MR ALAN ORR (instructed by the Solicitor, Board of Inland Revenue, Somerset House, Strand, W.C.2.) appeared as Counsel on behalf of the Appellant.
MR F. HEYWORTH TALBOT. Q.C., and MR G.B. GRAHAM (instructed by Messrs. Belly Brodrick & Cray, The Rectory, 29 Martin Lane, Cannon Street, E.C.4.) appeared as Counsel on behalf of the Respondent.
: This is an appeal by the Crown from a judgment of Mr Justice Upjohn dated the 20th December, 1957, whereby he affirmed a determination of the Special Commissioners dated the 24th July, 1956, in favour of the present Respondents, a company called Australian Mutual Provident Society, The case concerns the effect on the company's tax liability of the Double Taxation Relief (Taxes on Income) (Australia) Order of 1947.
The company is a mutual insurance company which was incorporated in New South Wales in 1849 and is now regulated by certain later Australian statutes. The company has a branch office in London and carries on part of its business here. It is important to observe that, as I have already mentioned, the company is a mutual insurance society.
I should next refer to some of the income tax provisions relating to insurance companies. Rule 15 of the Rules applicable to Schedule D, Cases I and II, in the Income Tax Act, 1918, provides as follows by subrule (1): "Where an assurance company carries on life assurance business "in conjunction with assurance business of any other class, the life "assurance business of the company shall for the purposes of this Act "be treated as a separate business from any other class of business carried "on by the company."
Then there is Rule 3 of the Rules applicable to Case III of Schedule D which has an important bearing on this case. That Rule provides as follows: "(1) Where an assurance company not having its head office in "the United Kingdom carries on life assurance business through any branch "or agency in the United Kingdom, any income of the company from the "investments of its life assurance fund (excluding the annuity fund, if "any), wherever received, shall, to the extent provided in this rule, "be deemed to be profits comprised in this Schedule and shall be charged "under this Case.
"(2) Such portion only of the income from the investments of the "life assurance fund for the year preceding the year of assessment shall "be so charged as bears the same proportion to the total income from "those investments as the amount of premiums received in that year from "policy holders resident in the United Kingdom and from policy holders "resident abroad whose proposals were made to the company at or through "its office or agency in the United Kingdom bears to the total amount of "the premiums received by the company:" –. Then there is a proviso in that sub-rule (2) under which other methods of calculation can be adopted. I do not think I need refer to that.
Then, (3): "Every such charge shall be made by the special "commissioners as though the company under the provisions of this Act had "required the proceedings relating to the charge to be had and taken "before those commissioners.
"(4) Where a company has already been charged to tax, by deduction "or otherwise, in respect of its life assurance business, to an amount "equal to or exceeding the charge under this rule, no further charge "shall be made under this rule, and where a company has already been so "charged, but to a less amount, the charge shall be proportionately "reduced."
These provisions are those contained in the Income Tax Act of 1918. There are seven years' assessments concerned in the case from 1947/48 to 1951/52. The Act of 1918 applies to the five earlier years and the Act of 1952 applies to the last two years. There is no material deference between the 1918 Act and the 1952 Act for the present purpose so that I can confine my references to the provisions in the Act of 1918.
The relevance of the fact that the company is a mutual insurance concern is this: it is well settled that a mutual insurance company is not liable to tax on its mutual insurance business on the ground that the surpluses arising arise front transactions by the members inter se which are not, for income tax purposes, regarded as a trade carried on by the company. Rule 3 of the Rules applicable to Case III of Schedule D was introduced, in fact, in the year 1915 by the Finance Act of that year., As to the provisions of that Rule, it was, I think, for some considerable time understood that the effect of it was to provide a mode of ascertaining the proportion of the investment income of the company concerned attributable to its business activities in this country and the method of calculation laid down is of a kind which one can readily understand as a rough and ready method of arriving at a fair proportion of that income.
The scheme was to take a sum arrived at by ascertaining the proportion of the premium income received in this country to the premium income received throughout the world. That proportion sum produced a figure which, as I have said, was, I think, long understood as representing simply a proportion of the income from investments corresponding to the proportion of the business done in the United Kingdom to the whole of the business done.
That view, however, was not accepted by the House of Lords in a case concerning this same company, the case of Inland Revenue Commissioners v. Australian Mutual Provident Society, which came before the House of Lords early in 1947 judgment having been delivered on the 31st March of that year. In that case the dispute was, as I understand it, of this nature: the company had amongst its investments certain investments which were exempt from income tax and the question was at what stage in the calculation prescribed by Rule 3 of Case III of Schedule D allowance ought to be made for these tax-free investments.
The company contended, as I understand it, that the deduction ought to be made from the proportion of income found to be attributable to United Kingdom activities under the provisions of the Rule for it was said that only thus could the company be given the full benefit of the exemption; on the other hand, the Crown's view was that the tax-free investments should be deducted from the totality of investments before applying the calculation to them. The view of the company on this matter, I understand, prevailed in this Court, but when the matter came before the House of Lords their Lordships took a radically different view.
This new way of looking at the matter was introduced into the case by an observation made by Lord Simon in the course of the argument at page 611 of the report. He said this: "Why does the existence of exempted "income affect the application of r. 3? Does the mere fact that it is "included as an item in the computation of the profits charged under r. 3 "amount to charging it with tax? The real question to be determined is "whether, on the true construction of the rule, there has been any error "or mistake in the case of this society which holds in its life assurance "fund investments exempt from income tax, and further what is the right "decision in view of the fact that the revenue has, in effect, made the "concession that the existence of the exempted income makes a difference "to the calculation."
At page 617 in the course of his Speech Lord Simon said this: "Section 15 of the Finance Act, 1915, was, it would seem, aimed at meeting "this difficulty," – that was the difficulty of taxing insurance companies situate as the respondent company in this case was, that is to say, foreign insurance companies with branches in this country – "and it did "so by providing for a conventional figure, which should be 'deemed to be'" profits, 'comprised in Schedule D, on which a non-resident life Insurance "company, with a branch in the United Kingdom, would make a contribution to "United Kingdom income tax, however it arranged its investments. The "previsions now contained in Rule 3 of case III call for the use of certain "factors in order to arrive at this conventional figure, upon which such an "assurance company as the respondent society is required to pay tax in respect" of the annual profit of its life assurance business carried on in this "country."
Then, at page 619, he said: "In the application of Rule 3, the "thing to be taxed is not, in whole or in part, exempted receipts, but is "a conventional or notional sum – calculated, it is true, by the use of "figures which might include the proceeds of exempted investments – but a "sum 'deemed to be profits,' to be charged as such, without any deduction "save that provided for in sub-rule 4."
Again, on page 620, he says: "Once it is accepted that rule 3 "of case III is not one which taxes income from investments, whether "exempted or not, but one which taxes a conventional sum calculated as the "rule directs, it becomes reasonably clear that the sum to be taxed is not "varied by inquiring whether one of the elements in the calculation contains "income from exempted investments. If variation is required on this ground, "it must be provided by legislation."
Then Lord Wright says this at page 622: "The charge was a tax on "the investment income only as a machinery to tax the general profits of "the British business, and as a manner of measuring the charge by an "arbitrary figure derived from a percentage of the investment income. "In this connexion it was not material to distinguish between exempted and "unexempted income. All that was needed was a yardstick."
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