High Court of Australia Menzies J. Producers & Citizens' Co-operative Assurance Co Ltd v Commissioner of Taxation (Cth) [1971] HCA 32 ORDER Appeal dismissed with costs. Usual order as to exhibits. Cur. adv. vult. Menzies J. delivered the following written judgment:— July 30 Menzies J The Commissioner has assessed the taxpayer to income tax for the year ended 31st August 1967 upon the footing that the deductions to which the taxpayer was entitled under s. 113 of the Income Tax Assessment Act 1936-1967 Cth were to be calculated as if $513,839, not $924,445, were the expenditure incurred in the year "in the general management of the business of the company". The difference, viz. $410,606, was, it was agreed, made up of the following payments: Divisional Managers Salaries 48,823 Divisional Managers Expenses (includes Motor Vehicle Expenses & Travelling Allowance) 40,835 Inspectors' Salaries 185,395 Inspectors' Expenses (includes Motor Vehicle Expenses & Travelling Allowance) 135,553 The question is whether this sum of $410,606, or any part of it, was expended in the general management of the business of the company. The taxpayer has, at all times material, been a life assurance company whose principal business is life assurance. It had not, for the year in question, made an election under s. 113 (1). The deduction to which it was entitled was therefore to be determined in accordance with s. 113 (2) and (3). These are as follows: 113 (2) In the case of a life assurance company the sole or principal business of which is life assurance, being a company that has not made an election that the last preceding subsection shall be applied in relation to the company, so much of the expenditure incurred in the year of income in the general management of the business of the company as bears to that expenditure the same proportion as the assessable income of the company bears to the total income of the company shall be an allowable deduction. (3) For the purposes of this section, expenditure— (a) of a capital nature; (b) exclusively incurred in gaining or producing assessable income; or (c) exclusively incurred in gaining or producing income that is not assessable income, shall be deemed not to be expenditure incurred in the general management of the company. The organization of the company was that it had a head office in Sydney, several branch offices in other capital cities, and about twelve divisional offices throughout Australia. There were divisional offices at such places as Newcastle and Toowoomba. Each divisional office was in the charge of a divisional manager. Under the divisional manager there were a number of so-called inspectors who were employees of the company and, who, with the divisional managers, constituted what might be described as the field staff. The taxpayer issued life policies, with or without additional benefits, endowment policies and sickness and accident policies. It was the principal concern of divisional managers and inspectors to obtain new business, but their duties did not stop there. Evidence, which I accept, was to the effect that the first and main duty of an inspector was to produce new business, and either comprehended within, or as an addition to, that duty, an inspector was expected to handle the following matters: Inspectors, or Divisional Managers (if there was no inspector in the area or in the more complicated cases) were expected to handle the following when requested to do so:— 1. Assignment ofPolicies: (a) Advises policyholder on course of action open to him. (b) Arranges for completion of Transfer Form. (c) Collects Stamp Duty on assignment. (d) Returns altered policy document to policyholder. 2. Maturities: (a) Inspector has discharge document completed by policyholder. (b) Collects policy document. (c) Sometimes delivers cheque for maturity. 3. Loans onPolicies/Surrender of Policies/Conversion to Paid Up Policy: (a) Policyowner, through Inspector, requests Loan, Surrender Value and Paid-Up Value of Policies. (b) Obtains completion of Loan/Surrender documents. (c) Sometimes delivers cheques for Loan advanced or Surrender amount of policy. (d) In cases of Paid-Up Policy arranges for completion of cancellation of standing premium orders on Bank Account. 4. Alterations ofPolicies: (a) Advises policyholder on methods and meaning of alterations available. (b) Upon determination of type of alteration, arranges completion of necessary documents as well as variations to any standing orders for payment of premium for bank account, e.g. Bank Orders, Periodical Debits. 5. LostPolicies: (a) Arranges for completion of Statutory Declaration by policyholder. Collects necessary funds for advertising cost re lost policy. 6. Conservation ofPolicies: (a) Inspectors requested to visit policyholders in areas in order to attempt collection of premiums. (b) Such policies are not in the majority of cases written by the visiting inspector. (c) There is no incentive paid to inspector if he obtains payment of premiums. (d) Advises policyholder on the courses of action open to him, e.g. Loan on Policy, Paid-Up Policy, Non Forfeiture Loan, Special Courses of Action, Special Loan Offers. Generally then organizes necessary documents to be completed by policy holder. 7. Revivals of LapsedPolicies: (a) Inspectors requested to visit policyholder to attempt revival of policy. (b) Completes all documents necessary for revival, e.g. Premiums Due, Health Declaration. 8. SpecialPolicies (Premium varies over the Years): (a) Policyholder generally makes inquiry to Office. (b) In most cases inspector is requested by Office to visit policyholder to collect the necessary extra premium and effect variations to standing premium payment authorities on bank accounts if necessary. 9. Miscellaneous: (a) Attempt to locate policyholders who have moved from known address without advising Office—Electoral Roll, Past Employer, etc. (b) Advise of change of address of policyholder where it comes to notice. (c) Inspectors advise of any deaths of policyholders where it comes to notice, even though they realize the deceased's solicitors will be in contact. (d) Inspectors advise change of name by marriage etc. (e) Policyholder correspondence to Office merely asking for inspector to visit them. Rarely is reason for request given. Inspector upon making visit could be dealing with almost any query ranging from mortgage loan application to questions regarding terms and condition of policy. (f) All delicate or complicated alteration requests. Office asks inspector to visit policyholder to obtain necessary information and documents, e.g. Adjustment of invalid Beneficiary Trustee Clauses. (g) All proposals for Insurance where client states he does not wish to continue with the contract are subject to a full inquiry by an inspector. No pressure is however put on client to continue with the proposal. The reason for the inquiry is to determine the cause of discontent and whether or not the cancellation of the proposal is the result of a twist by another Life company. The inspector generally delivers a cheque refunding the client's initial premium. (h) Submission of Mortgage Loan Application, determination of all necessary information. 10. AccidentClaims: (a) Completion of claim forms. (b) Occasional investigation of validity of claim including surveillance of claimants. 11. Recruiting of Sub-agents. 12. Assist Divisional Manager in training newinspectors. 13. Receive premiums for policyholders and remit toOffice. The duties of divisional managers were outlined as follows: In addition to the duties shared with inspectors, Divisional Managers had the following additional duties:— 1. Recruiting and training inspectors in selling and policy-owner service. 2. Maintenance of a divisional office with sometimes a small staff. This includes the location of office. 3. Submitted to office requests for Field Staff, Mortgages, Company Finance and Special Advances. 4. Prepared and submitted work performance reports on inspectors performance. 5. Dismissal of inspectors who failed to conform to the Company's requirements. 6. Disposal of dismissed inspector's motor vehicles of which the Company has a Bill of Sale as security for the finance granted. 7. Maintenance of Policy Records for Divisional area. Divisional managers, although called field staff, had, I am satisfied, a place in the management of the business of the company. They did not lay down company policy or rules, or make policy decisions, but it was part of their duties to see that the inspectors subject to their control observed company policy and complied with the company rules. They had to examine and report upon the work of inspectors and to dismiss inspectors who failed to conform to the company's requirements. They had offices with staff to run and records to maintain. Each inspector, on the other hand, had but to exercise his initiative in accordance with the company's policy and rules and the directions of his superior officers. An inspector managed no person and no activity. He did the work allotted to him subject to the control and supervision of his divisional manager. His main work was to write new business and to look after policy holders—to be, as it were, the link between the company and the policy holders within his area. An inspector did not make decisions on behalf of the company, although, no doubt, in the course of his work he could decide not to submit particular proposals for policies or loans to the company. No doubt an inspector made recommendations both to policy holders—prospective and actual—and to the company relating to matters such as the alteration of policies and the granting of loans, but decisions were made elsewhere. Apart from the recruitment of sub-agents and the giving of assistance to divisional managers and the training of new inspectors, the duty of an inspector was no more than to write new policies and service old ones and to help policy holders to make up best of their positions as policy holders. Having stated the facts I pass now to a consideration of s. 113. Subsections (2) and (3), as I read them, provide, as a deduction, a proportion of the total expenditure upon general management of the business of the company other than such expenditure falling within sub-s. (3). These subsections do not make provision for the apportionment of any item of expenditure. If an item of expenditure is within (a) or (b) or (c) of sub-s. (3) it is to be wholly excluded from the category of expenditure upon general management of the business of the company. Subsection (3) states exhaustively what is to be excluded from what would otherwise fall within the concept of expenditure in the general management of the business of the company. Without the aid of authority I am disposed to the view that the phrase general management in s. 113 is of narrower import than the word "management" by itself. To my mind the significance of the word "general" is that it points to management of a business as a whole, or in its main elements, in the same way as the general manager of a business is concerned with its overall management. It would be a matter of general management, for instance, to give directions for the purchase of goods by managers of a motel forming one of a chain of motels; whereas, it would not be a matter of general management for the manager of one of the motels to decide that a particular purchase would be in accordance with those directions, and to make it. To take another instance, the promulgation of rules for the employment of staff would be general management, as would supervision to ensure that the rules promulgated were being observed, but for a particular employing officer to apply the rules and employ a particular person would not, as I see it, be an act of general management. There must, I think, be some generality about general management. It was argued, however, that authority pointed in the opposite direction and would support reading the word "general" as expanding the ordinary notion of management. Thus Mr. Byers for the taxpayer placed reliance upon an observation of Romer L.J. in Sun Life Assurance Society v. Davidson (Inspector of Taxes) [1] , where his Lordship said: The ratio decidendi of Golder's Case [Capital and National Trust Ltd. v. Golder (H.M. Inspector of Taxes)] [2] , as it seems to me, was that the phrase "expenses of management", as used in s. 33 of the Income Tax Act, 1918, means, in effect, the expenses of the managers of a company (who would normally be the board of directors) and not the expenses incurred by the company in the general management of its business; in other words, the phrase is directed to the expenses involved in shaping policy and in other matters of managerial decision and does not extend to expenses subsequently and consequently incurred at lower levels of the company's executive structure. This, it was said, indicated that "general management" extended further than "management" and included what was done at the lower levels of a company's executive structure. However, I do not draw this inference from what was said. All that Romer L.J. was saying is that if "the expenses of management" is limited to "the expenses of the managers of a company" then the cost of shares bought is not within the concept of management. An examination of Golder's Case [2] , however, reveals that it did not decide that the expenses of management means "the expenses of the managers". The decision was that the purchase price of shares bought in the company's business fell outside any conception of management. The House of Lords so understood Golder's Case in Sun Life Assurance Society v. Davidson (Inspector of Taxes) [1] . See per Viscount Simonds [2] , Lord Morton [3] , Lord Reid [4] and Lord Somervell [5] . 1. [1956] 1 Ch. 524, at pp. 549-550. 2. (1949) 31 T.C. 265. 3. (1949) 31 T.C. 265. 4. [1958] A.C. 184. 5. [1958] A.C., at pp. 197 and 200. 6. [1958] A.C., at p. 202. 7. [1958] A.C., at p. 206. 8. [1958] A.C. at p. 209. It is not in doubt that "expenses of management" or the "expenses of general management" must go beyond the expenses of the managers and would include, for instance, the overhead expenses of providing the company with direction and control. Just how much further it goes is the problem to which s. 113 gives rise. Some reliance was also placed upon two cases in this Court. First the decision of Starke J. in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [6] . This was a decision upon s. 20 (5) of the Income Tax Assessment Act 1922-1930 Cth, the section now replaced by s. 113 and in a substantially different form. His Honour said [7] : It will be observed that s. 20 (5) refers to three classes of expenditure: the first, that exclusively incurring in gaining what I may shortly call premium income, the second, that exclusively incurred in gaining or producing the income included in the assessment, and the third, that part incurred in the general management of the business of the company but not including any expenditure incurred in gaining or producing the income included in the assessment. It recognizes that the expenditure of a company is not always exclusively incurred for the production of premium or assessable or non-assessable income, but may be undertaken for the general business purposes of the company, as, for instance, the class of expenditure often referred to as overhead expenses. But the classification of expenditure in s. 20 (5) is, I think, exhaustive: that which is not exclusively incurred in gaining premium income or assessable income is incurred in the general management of the business of the company. This statement was relied upon to support the argument that any expenditure not within s. 113 (3) is expenditure incurred in the general management of the business of the company, but that constructon of the section cannot be accepted. What would ordinarily be regarded as expenditure incurred in general management must be ascertained before sub-s. (3) operates to exclude from that expenditure anything falling within pars. (a), (b) and (c) thereof. It cannot be that any expense not within these three paragraphs is expenditure incurred in the general management of the company. 1. (1933) 49 C.L.R. 171. 2. (1933) 49 C.L.R., at p. 174. I was also referred to the observations upon s. 113 made by the Court in Federal Commissioner of Taxation v. Australian Mutual Provident Society [1] . The Court said: So far as s. 113 is concerned, the position is, we think, essentially the same, though there may be more, at first sight, to be said for the commissioner's view. We would think it clear that behind s. 113 lies the same fundamental conception that is inherent in s. 51, i.e. that primarily taxable income is to be assessable income less the cost of gaining or producing it. In applying s. 113 you begin by applying sub-s. (2) of that section, and you ask whether any particular expenditure in fact incurred by way of general management expenses can be exclusively referred to any particular assessable income in the sense that it can be isolated as the cost or part of the cost, of gaining that assessable income. You also ask whether any particular expenditure in the way of general management expenses can be exclusively referred to any particular non-assessable income (e.g. premium income) in the same sense. Having answered those two questions, you attribute to particular assessable income such sums as you have found to be exclusively referable to it, and make a deduction under s. 51 accordingly. You also attribute to non-assessable income such sums as you have found to be exclusively referable to it, and you exclude those sums from the calculation of taxable income, just as you exclude the non-assessable income. You then take the balance of the expenditure actually incurred in general management, and you work out the proportion sum which sub-s. (1) of s. 113 directs you to work out. In effect you apportion the balance of that expenditure between assessable and non-assessable income, and the proportion attributable to assessable income is an allowable deduction in ascertaining taxable income. The attribution is made on the arbitrary, though not apparently unreasonable, basis of the ratio between assessable income and non-assessable income. 1. (1953) 88 C.L.R. 450, at pp. 467 and 468. Here it is stated that the fundamental conception behind the provision is that primarily taxable income is to be assessable income less the cost of gaining or producing it, and it explains how that conception is worked out in sub-ss. (2) and (3). I have found, however, no guidance in the observations I have quoted on what is the critical question here, namely what is meant by the phrase "expenditure incurred in the general management of the business of the company". Accordingly, I find the authorities of little assistance in determining what is or is not expenditure in the general management of the business of the taxpayer. Some expenditure would clearly be within that concept; some just as clearly outside it. It is not necessary here to attempt an exhaustive definition of all that is within the concept. My task is more limited. I have to determine whether the salaries and expenses of (1) inspectors, or (2) divisional managers form part of the expenditure of the taxpayer incurred in the general management of its business. I take inspectors first. In the year of income they were paid salaries and expenses as servants of the company for doing the work already stated. That work, in my opinion, was not work that would, in ordinary usage, be regarded as part of the work of the management or the general management of the business of the company. It is not merely that inspectors are not themselves managers; it is rather that, as I see it, having regard to the considerations which I have mentioned previously, their work—apart, perhaps, from assisting divisional managers—is not part of management at all. The management of the company formulates their duties and supervises the discharge of those duties. The divisional managers are, I think, in a different category. Their work, as their title itself indicates, is part of the management of the business of the company, and my problem is whether, in the circumstances, that is enough, or whether the word "general" in the context in which it is to be found in s. 113 (2) does not narrow the concept to an extent which excludes their duties from its limits. I have come to the conclusion that it does. The officers in question, although managers, are local or sectional managers with no responsibility for policy and with very limited responsibility for making decisions within their own divisions and within the limits of the policy laid down by higher authority. Accordingly, although I would not exclude them from the role of management, I do exclude them from the role of general management. It is for the foregoing reasons that I have decided that the appeal should be dismissed.