MUDGMENT No.l +77 ee ras SePeaaaas FOR LIMITED CIRCULATION CATCHWORDS INCOME TAX - deductibility of life assurance premiums - arrears of premiums debited against bonus accumulations on policies upon bankruptcy of applicant - life assurance premiums as rebatable amounts for purpose of calculating taxpayer's concessional expenditure rebate under s. 159 of the Income Tax Assessment Act - whether moneys debited against bonus accumulations answer the description of moneys paid by the taxpayer. Income Tax Assessment Act, 1936: ss. S51, 159N, 159R SAMUEL PANAI v. COMMISSIONER OF TAXATION G637 of 1987 LOCKHART Jd. 8 FEBRUARY 1988 SYDNEY ie IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) ) No. G637 of 1987 BETWEEN : SAMUEL PANAI Applicant D: COMMISSIONER OF TAXATION Respondent JUDGE MAKING ORDER: LOCKHART J. DATE OF ORDER: 8 FEBRUARY 1988 WHERE ORDER MADE: SYDNEY MINUTE OF ORDER THE COURT ORDERS THAT: 1. The appeal be dismissed; Zs There be no order as to the costs of any party to the appeal. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G637 of 1987 ) GENERAL DIVISTON ) BETWEEN : SAMUEL PANAI Applicant AND: COMMISSIONER OF TAXATION Respondent COURT: LOCKHART J. DATE: 8 FEBRUARY 1988 REASONS FOR JUDGMENT LOCKHART J. In this matter Samuel Panai has appealed against the disallowance by the respondent, the Commissioner of Taxation, of moneys claimed to be payments of life assurance premiums and deductible under the relevant provisions of the Income Tax Assessment Act 1936 ("the Act"). The year of income in which a deduction for the premiums was claimed is the year ended 30 June 1983. Some recitation of the facts is needed to properly understand the basis of the claim and its nexus with that year. The applicant had taken out three policies of life assurance which were in the nature of whole of life policies over his own life. He was both the life assured and the owner of the policies which had been in existence since about 1958. Those policies had obviously 2. acquired surrender value over the succeeding 20 years. The applicant had, between 1958 and 1978, paid the premiums from his own moneys, and claimed those payments as deductions under the relevant provisions of the Act. Such deductions had been alilowed. The applicant became bankrupt in 1978. It appears that following his bankruptcy there were discussions between the applicant and officers of the Australian Mutual Provident Society ("AMP") and between the applicant and officers of the Commissioner of Taxation. The applicant did not thereafter make claims for deductions for premiums payable or paid by him. There appears to have been'_ some understanding that if in due course the applicant was able to make good the arrears of premium, they could in some way be added together and claimed as a deduction against the income of a later income year, or that amendments could be made to previous assessments in respect of the years in which the premiums would ordinarily have been paid. I do not have the policies before me nor dotI have the evidence from the AMP of any arrangement made between it and the applicant. However, I am prepared to act on the evidence given by the applicant, meagre though it is,in relation to these matters. The Commissioner takes no objection to that course. It appears that from 1978 onwards, since the applicant did not have available to him cash with which to pay premiums, the AMP debited the amount of the premiums due each year together with an interest component against the bonus accumulations on the three policies concerned. The debiting of those two classes of liabilities continued until 1983 when the AMP asserted that the accrued value of the bonuses was exhausted. Since there was no further source available for any payment of premiums, the policies were cancelled. It is not entirely clear from the evidence as to the basis upon which the AMP engaged in the course of charging premiums and interest against the bonuses on the policies. No doubt the AMP took the view that it was entitled to do so, pursuant to its policies, but the evidence presently before the Court does not establish the legal source of the AMP's authority. It is not uncommon, however, for life policies to contain provisions entitling life assurance companies in events such as those in issue here to debit moneys due by policy holders for premiums against the accrued value of bonuses and to charge interest upon the amounts of those debits. These arrangements sometimes take the form of a loan by the ansurance company to the insured, but at other times may take different forms. It is difficult on the evidence before me to determine on which particular basis the arrangement was made in this case. But I do not think, on the view I take of the facts, that the form of the arrangement matters. In the 1983 income year the applicant claimed a deduction of $8,739 being the accumulation over the years since 1978 of the premiums due by him together with the interest component which had been debited by the AMP to the bonus accounts on the policies. The precise composition of the premium and interest components 1s not clear, but the applicant says that the amount of about $3,600 represents premiums, the balance being interest. I am content to deal with the matter on the basis that the applicant's statement of the amounts 1n issue 185 accurate, and no opposition was raised to this course. The area of law in which the case falls to be determined is not without its subtleties and difficulties. For many years taxpayers were entitled to claim as deductions from their assessable income amounts paid by them to life assurance companies by way of premiums. Such a claim was in that period made as a simple claim for deduction pursuant to specific statutory provisions and not pursuant to s. 51 of the Act. However, amendments to the Act produced the effect that the claim for an outright deduction was restricted to aclaim by a taxpayer of amounts up to $1,200 paid during the relevant year of income as life assurance premiums or superannuation contributions or other like amounts, the latter claim being available under s. 159R of the Act. Such payments qualified as rebatable amounts for the purpose of calculating a taxpayer's concessional expenditure rebate under s. 159N of the Act, which was inserted by Act No. 117 of 1965 and amended by Act No. 126 of 1977. The concession was subject to various conditions the effect of which was that the concession was not available for payments made for life assurance benefits realisable in the short term, and to certain other conditions which are not relevant for present purposes. Section 159R, which afforded that concessional expenditure rebate, was repealed by Act No. 123 of 1985. However, the 1983 income year is in question here and the concessional rebate was in operation during that year. To determine the true legal character of the deduction claimed by the applicant is no easy task. The applicant cannot claim the amounts in question as an outright deduction, and sufficient of the history of the matter has been outlined above to make that much clear. Nor does the applicant assert, nor on the evidence could he assert, that his claim can be sustained under s. 51. Such claim would 5. fit under neither limb of that section, and even if this was not' the case the claim would be excluded as an item of private or domestic expenditure. If the applicant's claim were to be treated as a claim for payment of a life assurance premium qualifying as a rebatable amount for the purpose of calculating the applicant's concessional expenditure rebate under 5. 159N of the then Act, 1t would still have difficulties in the path of its being upheld. First, the applicant's claim 1s for an accumulation of premium and interest payable in the years between 1978 and 1983. It is by no means clear that the claim could be treated as being relevant for the 1983 income year. Whatever be the answer to that question, the evidence does not establish that the applicant's concessional expenditure in relevant years exceeded the threshold prescribed to establish a claim to a rebate under s. 159N of the Act. These in themselves are reasons which would defeat the applicant's claim. However, I am prepared to consider that claim ona more substantial footing. Assuming the claim in the applicant's 1983 return can be properly treated as a claim for the concessional rebate, and assuming further that all else favoured allowing the rebate, I am not satisfied that the moneys in question answer the description of moneys paid by the taxpayer. The law on payment of premiums on account of life assurance policies has been the subject of more than one decision. The attitude taken by the courts, including the High Court, has been to apply strictly the notion of payment. In particular, there is authority 6. that premiums credited against an insurance policy do not answer the description of amounts paid by the taxpayer unless the taxpayer has borrowed from the insurance company against the value of the policy. It is sufficient to refer to the decision of Fullagar J. in Crowe v. Federal Commissioner of Taxation (1958) 11 A.T.D. 478 at 479, where his Honour observed that a deduction would be available only where the premium "is not only paid by him but payable by him by virtue of a contract of insurance between him and an insurer", and denied a deduction to the taxpayer on the facts of that case on the ground that although "there was clearly a payment ... the amount paid was not payable hy the taxpayer, and was not paid by her". On the evidence before me the debiting by the AMP of the bonus account of the applicant with the amount of the premiums. (I ignore the interest for this purpose) could not constitute a payment by the applicant of the premiums. It is ultimately on that graund that I dismiss the claim. This is a difficult area of law and it 185 one which may at times appear to taxpayers to be unjust. Ido not myself see such injustice in this case. Even if the applicant had in fact made payments in cash prior to the cancellation of the policy to make up for the earlier years of arrears, there would then have been a real question of law as to whether he could properly claim the relevant amounts either as deductions or as part of the concessional rebates. The answer to that question is not clear, but does not fall to he determined on the present facts. m4 7. In the circumstances the The Commissioner has not asked for costs. I certify that six (6) pages reasons for Jj Honourable Mr. appeal must fail and 15 dismissed. costs and there is no order as to this and the preceding are a true copy of the udgment herein of the Justice Lockhart. Associate h.J.Bocle — Date: 8 February 1988 The applicant appeared in person. Solicitor for the respondent: Date of hearing: Date of judgment: Australian Government Solicitor 8 February 1988 8 February 1988