Commissioner of Taxation v Crown Insurance Services Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (High Court of Australia: B69 of 2012; Full Federal Court: QUD 668 of 2011)
Judgment date: 2 November 2012
Date published: 6 January 2014

Summary of decision:
Outlines the ATO's response to this case which concerns questions dealing with source of income derived from business activity and whether income of the taxpayer was derived directly or indirectly from Australian sources.

Overview of facts:
1. The taxpayer was an insurer incorporated in Vanuatu | 2. The only business of the taxpayer was to provide insurance to Australian companies whose business was the provision of funeral benefits to members of the indigenous community in Australia. | 3. All of the Australian companies and the taxpayer were under common ownership. | 4. The Aboriginal Community Benefit Fund No 2 Pty Ltd ('ACBF Pty Ltd No 2') which was typical of the Australian companies was constituted by a trust deed which provided for it to "stand possessed of the Trust fund and the income thereof upon trust for the Members upon the trusts and with and subject to the powers and provisions" expressed in the Deed. | 5. Clause 13.5.1 of the Deed provided "The Trustee shall at all times maintain a Group Life Policy in respect of the lives of the Members for the time being of the Fund of not less than the total benefits payable to the Members." | 6. Pursuant to the terms of the Trust Deed, National Mutual Life Association of Australasia Limited ('National Mutual') was originally utilised as insurers of the full death benefit payable to members. | 7. By about 2000 the Australian companies were dissatisfied with the time taken to process claims in respect of the death of members and decided to establish a new insurer, the business of which would be confined to insuring the Australian companies. | 8. However under Australian law an insurer required net assets of at least $5 million, whereas only $200,000 was required to establish a company in Vanuatu to hold an insurance licence there. | 9. As a result the taxpayer was established in Vanuatu as a Vanuatu company. | 10. The taxpayer subsequently entered into contracts of insurance with the Australian companies. In each case the contract was made in Vanuatu under which contract ACBF Pty Ltd No 2 complied with its obligation to maintain a group life policy. | 11. Pursuant to the group life policies the taxpayer received premiums from the Australian companies. For most of the relevant period ACBF No 2 and the other Australian companies remitted to the taxpayer the premiums received from members less the amount of claims paid out. | 12. On review before the Administrative Appeals Tribunal, the Tribunal decided relevantly that the source of the taxpayer's income "was the insurance contracts with the various member companies." As the contracts were made and performed in Vanuatu, the Tribunal was satisfied that the taxpayer's income was not derived from sources in Australia. | 13. The issues before the Full Federal Court were whether the Tribunal's finding raised a question of law and if so whether the facts found by the Tribunal fell within the terms of s6-5(3) of the ITAA 1997. | Issues decided by the court | The Court's Judgment was handed down on 2 November 2012 with the Court ordering that the Commissioner's appeal be dismissed. The majority of the Court (Lander & Foster JJ) dismissed the appeal on the basis that the appeal was incompetent. They considered that there was no question of law on the construction of s6-5(3). The dissenting Judge (Jessup J) would have allowed the Commissioner's appeal. His Honour was of the view that a question of law did arise on the construction of s.6-5(3), particularly on the meaning of 'income derived ... indirectly..' on the basis of the fifth proposition in Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280. Having concluded that a question of law arose, his Honour found that 'there was an undeniable, though indirect, relationship between the [taxpayer's] entitlement to, and the amount of, those premiums, on the one hand, and the circumstances of, and the contributions made by, the members of the No 2 Fund, on the other hand. His Honour took the view, on the basis of the material before the Tribunal, there was only one conclusion open to the Tribunal; and that was that the taxpayer's income had its source in Australia. | At the Special leave application before the High Court heard on 6 June 2013, the High Court in refusing special leave to appeal stated: In light of the decisions of this Court in Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183, Federal Commissioner of Taxation v Mitchum (1965) 113 CLR 401 and Collector of Customs v Agfa-Gevaert (1996) 186 CLR 389, this is not a convenient vehicle in which to explore the distinction between questions of fact and questions of law. Special leave to appeal is refused.

Issues decided:
The Court's Judgment was handed down on 2 November 2012 with the Court ordering that the Commissioner's appeal be dismissed. The majority of the Court (Lander & Foster JJ) dismissed the appeal on the basis that the appeal was incompetent. They considered that there was no question of law on the construction of s6-5(3). The dissenting Judge (Jessup J) would have allowed the Commissioner's appeal. His Honour was of the view that a question of law did arise on the construction of s.6-5(3), particularly on the meaning of 'income derived ... indirectly..' on the basis of the fifth proposition in Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280. Having concluded that a question of law arose, his Honour found that 'there was an undeniable, though indirect, relationship between the [taxpayer's] entitlement to, and the amount of, those premiums, on the one hand, and the circumstances of, and the contributions made by, the members of the No 2 Fund, on the other hand. His Honour took the view, on the basis of the material before the Tribunal, there was only one conclusion open to the Tribunal; and that was that the taxpayer's income had its source in Australia. At the Special leave application before the High Court heard on 6 June 2013, the High Court in refusing special leave to appeal stated: In light of the decisions of this Court in Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183, Federal Commissioner of Taxation v Mitchum (1965) 113 CLR 401 and Collector of Customs v Agfa-Gevaert (1996) 186 CLR 389, this is not a convenient vehicle in which to explore the distinction between questions of fact and questions of law. Special leave to appeal is refused.

ATO view of decision:
In light of the conclusion of the majority that the question decided by the AAT was one of fact, this case will have no precedential effect. The Tribunal's decision has no application beyond the particular circumstances of the case. Whether income is derived, directly or indirectly, from sources in Australia pursuant to section 6-5(3) of the ITAA 1997 will be determined on the facts as found. Nathan's case is still to be regarded as the leading case on source of income, The High Court's reference therein to income derived indirectly from Australian sources is unaffected by the decision of the Tribunal (emphasis added).

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | Nil

Legislative references: Administrative Appeals Tribunal Act 1975 s 25 s 43 s 44 Income Tax Assessment Act 1936 s 26 Income Tax Assessment Act 1997 s 6-5 Taxation Administration Act 1953 s 14ZZ
Case references: Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36 (1996) 186 CLR 389 35 ATR 249 96 ATC 5240 Collector of Customs v Pozzolanic Enterprises Pty Ltd [1993] FCA 322 (1993) 43 FCR 280 Nathan v Federal Commissioner of Taxation [1918] HCA 45 (1918) 25 CLR 183 Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCAFC 154 (2007) 243 ALR 728 2007 ATC 5044 67 ATR 544 Tariff Reinsurance Ltd v Commissioner of Taxation (Vic) [1938] HCA 21 (1938) 59 CLR 194
Subject references: Income tax Foreign resident Australian sourced income Question of law