ADMINISTRATIVE APPEALS TRIBUNAL, AUSTRALIA | Australia and Vanuatu | Resident | Relevant Cases in the field of international taxation

ADMINISTRATIVE APPEALS TRIBUNAL, AUSTRALIA | Australia and Vanuatu | Resident | Relevant Cases in the field of international taxation

ADMINISTRATIVE APPEALS TRIBUNAL, AUSTRALIA

Crown Insurance Services Ltd.

v.

Commissioner of Taxation*

P. E. HACK SC, DEPUTY PRESIDENT

ADMINISTRATIVE APPEALS, TRIBUNAL NOS. 2010/2895-98

NOVEMBER 30, 2011

†AUSTRALIA - Australia and Vanuatu - Resident - Australian Income-tax Assessment Act 1936 (Cth) and Australian Income-tax Assessment Act 1997 (Cth) - Income Years 2004, 2005, 2006 and 2007 - Applicant, C, was insurance company/incorporated in Vanuatu - P remained controlling mind of C - From 2002, C entered into contracts with Australian companies (ACBF Group) which provided funeral benefits on death of Australian residents who were members of various funds operated by these companies - As a rule, member company would not send claim to C unless it was satisfied that all pre-conditions for payment had been met - Thus, very few claims were refused and C authorised payment of claims promptly - Despite being incorporated in Vanuatu C lodged returns for each of income years - Commissioner made assessments of Income-tax payable by C in each of relevant Income-tax years on footing that C was resident of Australia for Income-tax purposes during those years or that C's income in those years had its source in Australia - C objected to assessments but its objections were disallowed - Whether since C maintained its own accounts and self-evidently proposed (and had audited) its annual accounts, there was no reason to infer that it did not maintain financial records sufficient to adequately record its financial affairs - Held, yes - Whether entire arrangement was structured to ensure that C did not accept proposal except in circumstances where acceptance occurred in Vanuatu - Held, yes - Whether C's role in claims process was not that of mere "rubber stamp" to work undertaken by member companies in Australia - Held, yes - Whether, therefore, C did not carry on business in Australia during relevant years - Held, yes - Whether C had a business separate to those of member companies and that P's continued involvement in business of member companies was not indicative of strategic management and control of C - Held, yes - Whether, therefore, C did not have its central management and control in Australia during years in question - Held, yes - Whether when source of C's income was insurance contracts with various member companies and such contracts were made and performed in Vanuatu, not in Australia, then it could not be concluded that C's income was derived from a source in Australia for purposes of ITAA 1936 - Held, yes - Whether, therefore, matter was to be remitted to Commissioner with a direction that C's objection decision be allowed in full - Held, yes

FACTS

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The applicant, C, an insurer, was a company incorporated in Vanuatu. It obtained an "exempted insurer" licence under the Insurance Act of Vanuatu. P remained at all material times, the controlling mind of C. From 2002 C entered into contracts with Australian companies (ACBF Group) which provided funeral benefits on the death of Australian residents who were members of various funds operated by the Australian companies. It was A's practice (internal accountant for the ACBF group) to satisfy himself that claims made were in order. As a rule, the member company would not send a claim to C unless it was satisfied that all pre conditions for payment had been met. Thus, very few claims were refused and C authorised the payment of claims promptly.

Despite being incorporated in Vanuatu, C lodged returns for each of the 2004, 2005, 2006 and 2007 income years. The Commissioner made assessments of Income-tax payable by C in each of the 2004, 2005, 2006 and 2007 Income-tax years on the footing that C was a resident of Australia for Income-tax purposes during those years or that C's income in those years had its source in Australia.

C objected to the assessments but its objections were disallowed. Thereafter, it sought a review of the Commissioner's objection decisions.

HELD

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Two broad issues arose in the proceedings - was C a resident of Australia for any of the years in issue or, if it was not, did its income in those years have its source in Australia. [Para 40]

It was common ground that C was not incorporated in Australia. Accordingly, the only part of the definition of "resident" or "resident of Australia" in s 6 of the Income-tax Assessment Act 1936 (the ITAA 1936) was relevant. The Commissioner did not put his case on any basis involving voting power. Thus, the two questions that arose for determination of residence were :

  ♦  did C carry on business in Australia during the relevant years;

  ♦  did C have its central management and control in Australia during the relevant years.

The requirements were cumulative. [Para 41]

Regardless of the question of C's residence it would be necessary to consider the source of C's income. That was the consequence of s 6-5 of the Income-tax Assessment Act 1997 (the ITAA 1997). Thus whether C was a foreign resident or an Australian resident it was necessary to consider the source of its income. [Para 42]

Residence

Did C carry on business in Australia?

C contended that it did not carry on business in Australia. It was in the business of reinsurance and it conducted that business in Vanuatu, not Australia. It stressed the separation that existed in fact and in law between C and the member companies. [Para 43]

The Commissioner contended to the contrary. In reality, said the Commissioner, C was a captive group insurer whose business was inextricably interwoven with that of the member companies. It was said that the member companies, as C's "administrators" in Australia, carried on the insurance business by which the premium amounts were derived. But the Commissioner did not suggest that C was merely a façade or that any reason existed to ignore the ordinary legal distinctions between separate legal entities. [Para 44]

Having considered the evidence the Tribunal was satisfied that C did not carry on business in Australia. [Para 45]

It was to be concluded that C was an insurer but the member companies were as well. C (with the member companies) and the member companies (with the members) entered into contracts whereby, in consideration of the payment of sums of money during the currency of the contract (premium) the insurer would make a payment upon the happening of a specified event involving an element of uncertainty. [Para 49]

The Commissioner submitted that C was obliged to prepare and issue membership application forms, health statements, guidelines and claim forms. The Tribunal did not see why that should be so. The members were not joining C, they were joining the member company. The forms identified by the Commissioner were prima facie concerned with the relationship between the member company and the members. Health guidelines had been prepared by the member entities and were relied upon by those entities to determine whether a member's application would be accepted or rejected. On a very few occasions reference was made to C where there was doubt whether the applicant's health was acceptable but by and large the member companies made these decisions in the first instance.[Para 52]

The Commissioner's submissions failed to acknowledge the terms of the contracts between the member company and the member. The ACBF entity was obliged to maintain a group life policy in respect of the lives of the members but it was not obliged to pay the benefit in the event that the insurer did not pay the member company in respect of that member's death. Thus C, and no doubt AXA and NM before, had no interest in membership applications or health statements at any time prior to the making of a claim. Subject to any question of misleading or deceptive conduct the member companies were at liberty to accept new members on the basis that there were no benefits payable for the benefit of the member if the insurer did not pay. [Para 53]

There was, as the Commissioner submitted, no evidence that C maintained a data system or contracted with any other entity to provide one. Nonetheless C had records of the policies that it entered into; thus, the Tribunal would not have thought that any greater degree of formality was required. [Para 54]

C maintained its own accounts and self-evidently proposed (and had audited) its annual accounts. The Tribunal saw no reason to infer that it did not maintain financial records sufficient to adequately record its financial affairs. The notion of invoicing and receipting premiums was somewhat incongruous in an arrangement such as the present where C was paid the premiums and shared surpluses with the member companies. [Para 55]

The Tribunal was of the opinion that the business of C was confined to the entry into the various contracts with the member companies whereby in consideration of the payment of the premiums, C agreed to pay the defined benefit to the member company. C was not concerned, in a contractual sense, with the payment of the defined benefit for the benefit of the fund member. [Para 56]

The external indicia of C, its registered office and its business premises, were all situated in Vanuatu. Its accounts were prepared in Vanuatu, from primary documents held in Vanuatu and audited by auditors in Vanuatu as was required by the laws of Vanuatu. Company meetings were conducted in Vanuatu and all of its corporate and financial records were maintained there. Necessarily, none of those matters were, or took place, in Australia. [Para 57]

If the business of C was the entry into the various contracts with member companies and the performance of those contracts it was not possible to find any Australian element to that business beyond the presence in Australia of the various entities insured under those contracts. All of the proposals were prepared by P on his lap top (albeit copied in substance from the NM policy documents) and executed for C in Vanuatu. [Para 58]

There was no need to re-state the terms of a bargain in a fuller or more precise way. If there was to be a bargain, its terms were completely determined. At the conclusion of the meeting on 24 May 2002 what remained to be done was for C to accept the proposals. It might well have been a virtual certainty that C would accept the proposals and that, thereupon, contracts would come into existence, however, that P was sufficiently astute to go out of his way to ensure that there was no acceptance in Australia. He was conscious of the restrictions on carrying on business as in insurer in Australia without appropriate approvals. The entire arrangement was structured to ensure that C did not accept the proposal except in circumstances where the acceptance occurred in Vanuatu. [Para 60]

In these circumstances there was no need to deal with C's detailed submissions designed to demonstrate that P lacked authority to bind C. Rather, P was at pains to ensure that C only accepted the various proposals in Vanuatu and that it, in fact, did so. [Para 61]

If the contracts that were the basis of C's business were made in Vanuatu it remained to consider where performance of those contracts was undertaken. There were two essential elements of performance of those contracts - the receipt of premiums and the payment of claims. [Para 62]

Premiums were paid to C in Vanuatu by the member companies. They were paid net of claims paid but the Tribunal did not regard that practice as having any particular significance; to effect a set off was sensible for both parties. The approval of claims by C was perfunctory yet the material satisfied the Tribunal that C was required to, and did, approve the payment of claims. In the situation where the member company was dealing directly with the representative of the deceased member in order to obtain the information necessary to progress the claim on to C, there was nothing untoward in A (or another ACBF employee) satisfying himself that the claim was in order and making a recommendation to C about the payment of the claim. It was to be accepted that, ultimately, that decision was made by a representative of C in Vanuatu. [Para 63]

The Commissioner submitted that A played a role in determining claims. That conclusion was said to be evidenced from the fact that claims were not forwarded to C where the cause of death was suicide. The Tribunal could not see how that suggested, even remotely, that A (or an ACBF company) played any role in determining claims. Suicide was expressly excluded; there was no point in a member company submitting such a claim as it was bound to fail. [Para 64]

The Commissioner was also critical of the perfunctory checking of claims by C. It appeared to be the case that C paid out on, for all practical purposes, 100 per cent of claims submitted. [Para 65]

The rate of claims paid out was attributable to both C's attitude of being "very pleased to pay out" and the practice of the member companies of not forwarding claims that were bound to be rejected. The Tribunal could not accept that it was attributable to an absence of checking. [Para 66]

Thus, the Tribunal had to reject the Commissioner's submission that C's role in the claims process was that of a mere "rubber stamp" to the work undertaken by the member companies in Australia. The Tribunal was satisfied that C made the decision on whether to pay a claim, not one of the member companies. [Para 67]

The Tribunal was then satisfied that C did not carry on business in Australia during the relevant years. [Para 68]

Central management and control

The Commissioner's case was that during the years in question C had its central management and control in Australia. It pointed to the fact that P, who was a director throughout the period, spent more time in Australia than in any other country. A similar submission was made in relation to T who was a director from August 2005 to August 2007. But beyond that the Commissioner pointed to little else. Reference was made to a statement by P in earlier proceedings.

That evidence, it was said, demonstrated that P exercised strategic control over C while in Australia. How P exercised strategic control over a company which did not then exist was never made clear to the Tribunal. Thus, the notion was to be rejected that the fact of the meetings said anything about the location of the central management and control of C. [Para 69]

Then it was said that the group policies were the result of copying much of the content of the NM policy "held on the files of the head office of the ACBF group at Coolangatta." So much might be accepted. But the work of preparing the final document was not undertaken at Coolangatta and, more importantly, acceptance of the proposals occurred in Vanuatu, not Australia. [Para 70]

The Commissioner submitted that C did not have a business separate to those of the member companies and that P's continued involvement in the business of the member companies was indicative of strategic management and control of C. The Tribunal was not to accept either premise of the submission. [Para 72]

The Tribunal did not accept the proposition that C was, as the Commissioner put it, "a division of the ACBF Group." It had a separate legal entity, a separate business and it carried on its business under the control, in the main, of P and later T. The Tribunal accepted P's evidence that he was at pains to remove himself from the operations of the member companies from July 2001. That evidence was corroborated by the other ACBF employees. It was to be accepted that P was instrumental in having H appointed to his position and that P attended the Coolangatta offices from time to time. But P was the majority shareholder of the member companies and had had decades of experience with the companies. It was in his personal interests to ensure that someone in whom he had confidence (H) was appointed as sales manager. Equally, it was in his personal interests to catch up with A and other staff members from time to time and to provide advice and assistance where it was sought. [Para 73]

The Tribunal was satisfied that C did not have its central management and control in Australia during the years in question. Were it necessary to reach a conclusion on where central management and control was, the Tribunal would have no hesitation in concluding that its operations were controlled and directed in Cf Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation [1941] 64 CLR 241, Vanuatu. It was incorporated in that country, it held its directors' meetings in that country, its accounts were prepared, kept and audited in that country, its employees or agents resided in that country, the insurance contracts that were the basis of its business were made in that country and decisions or claims under those policies were made in that country. But it was sufficient to say that none of those activities were undertaken in Australia. [Para 74]

The Tribunal was then satisfied that C neither carried on business in Australia nor had its central management and control in Australia and that, accordingly, it was not an Australian resident during any of the income years in issue. [Para 76]

An Australian Source

The terms of s 6-5 of the ITAA 1997 had already been noted. If C was a foreign resident (or not an Australian resident) its assessable income included ordinary income derived from Australian sources. It was common ground that C's income was ordinary income and that its income was derived. The question was whether it was "derived from a source in Australia for the purposes of" the ITAA 1936. [Para 77]

Both C and the Commissioner made reference to Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vic) [1938] 59 CLR 194. The appellant in that case was a company incorporated in England which carried on business as a reinsurer. It entered into a treaty of reinsurance with a Victorian motor vehicle insurer by which it would reinsure two-thirds of the risks insured by the Victorian insurer in consideration of payment (into a bank account in Melbourne) of two-thirds of the gross premiums, less certain deductions. In a passage to which the Commissioner drew my attention Latham CJ said :

"In order to determine whether the profits are derived in or from Victoria it is necessary to ascertain what the taxpayer does in order to obtain the profits in question." [Para 78]

For his part the Commissioner focussed upon the original source of C's income, premium amounts received directly or indirectly by the ACBF group entities in Australia, from fund members solely in Australia, after management fees and other expenses had been deducted by the ACBF group. [Para 79]

The Commissioner illustrated that submission by reference to the 2004 income year. In that year C had gross income of $1,394,756, comprising interest of $6,337 and premiums of $1,388,419. The amount of $1,388,419 was described as premiums received in C's audited financial statements for the year ended 30 June 2004. For the financial accounts of ACBF No. 2 for the year ended 30 June 2004 expenditure of $1,388,419.65 was described as "underwriter payments" [Para 80]

Then the Commissioner made reference to an analysis of premiums and claims prepared by A, internal accountant for the ACBF group. For the period from September 2003 to November 2003, premiums of $108,224.10 were paid to C for the month of September 2003, $125,574.30 for October 2003 and $106,103.25 for November 2003. But, at least during the initial years, the gross premiums were not remitted to C in Vanuatu; what was remitted was an amount net after claims and some bank costs had been deducted. Thus for the month of September 2003 (where premiums totalled $108,224.10) an amount of $81,196.24 was credited to C's account at the ANZ Bank, Vanuatu. The difference comprised claims paid totalling 27,000 and bank charges of $28.00. [Para 81]

The Commissioner's submissions focussed upon the fact that the original source of the amounts remitted to C was the payments by members in Australia. So much might be accepted. But the policy holders in Tariff Reinsurances were the original source of the amounts received by that company. The Commissioner submitted that the decision in Tariff Reinsurances Ltd. (supra) was distinguishable. C was not a reinsurer of insurance risk (as Tariff Reinsurances was); its position, the Commissioner submitted, was analogous to that of the Victorian insurance company in Tariff Reinsurances. The Tribunal did not regard the case as distinguishable on that basis. The case was not authority for such a simple proposition. The case emphasised that regard must be had to the substance of the transaction i.e. what did C do to receive the income. [Para 82]

Next the Commissioner submitted that the case was distinguishable because C received the totality of the premium income from insurer persons. The submission was correct to certain extent but the Tribunal did not accept that such a finding was open on the whole of the evidence. The agreements between C and the member companies permitted the sharing, in agreed proportions, of the excess of premiums over claims, a continuation of similar arrangements made with NM and AXA. [Para 83]

Finally the Commissioner sought to distinguish Tariff Reinsurances on the basis that C's real connection as insurer was to Australia; its business as a "captive insurer" was to facilitate the business model of the member companies. As would be apparent from the earlier discussions regarding residence the Tribunal did not accept that that was the proper characterisation of C's business. [Para 84]

The source of C's income was the insurance contracts with the various member companies. The Tribunal was satisfied that the contracts were made in Vanuatu. And the Tribunal had already concluded that those contracts were performed in Vanuatu, not Australia. The Tribunal was then satisfied that C's income in the years in issue was not derived from sources in Australia. [Para 85]

Conclusion

In each application, the objection decision would be set aside and the matter remitted to the Commissioner with a direction that C's objection decision be allowed in full. [Para 86]

CASES REFERRED TO

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Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vic) [1938] 59 CLR 194 (para 47), Masters v. Cameron [1954] 91 CLR 353 (para 59) and Cf Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation [1941] 64 CLR 241 (para 74).

M van der Walt and Small Myers Hughes (Solicitors)for the Applicant.Ms. E Ford and ATO Legal Services Branch (Solicitors)for the Respondent.

REASONS FOR DECISION

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Introduction

1. The applicant, Crown Insurance Services Limited, is a company incorporated in Vanuatu. It is an insurer. From 2002 it entered into contracts with Australian companies which provide funeral benefits on the death of Australian residents who are members of various funds operated by the Australian companies. The respondent, the Commissioner of Taxation, has made assessments of income tax payable by Crown in each of the 2004, 2005, 2006 and 2007 income tax years on the footing that Crown was a resident of Australia for income tax purposes during those years or that Crown's income in those years had its source in Australia.

2. Crown objected to the assessments but its objections were disallowed. It now seeks a review of the Commissioner's objection decisions.

Background

The companies and the main actors

3. There are a number of companies, some with similar names, which need be considered. There are five companies that deal (or have dealt) directly with members. Where necessary, I will describe them as member companies. They are,

(a)  Aboriginal Community Benefit Fund Pty Ltd (ACBF) was incorporated in February 1992. It was the trustee of the Aboriginal Community Benefit Fund (Fund 1);

(b)  Aboriginal Community Benefit Fund No 2 Pty Ltd (ACBF No 2) was incorporated in January 1992 under the name Rainbow Insurance Advisory Service Pty Ltd. It changed its name to its present title in December 1993. It was the trustee of the Aboriginal Community Benefit Fund No 2 (Fund 2);

(c)  ACBF Funeral Benefit Fund No 2 Pty Ltd (incorporation details not known) (ACBF White 2) was the equivalent, for non-indigenous Australians, to Fund 2. I will follow the applicant's pattern of describing it as White Fund 2. Its history is similar to that of Fund 2;

(d)  ACBF Funeral Plans Pty Ltd (Plans) was incorporated in December 1997 (under the name ACBF Funeral and Benefit Fund Management No 1 Pty Ltd). It changed its name to its present title in November 2004. Membership of ACBF Plans was apparently only open to indigenous Australians;

(e)  ACBF Funeral Plans Australia Pty Ltd (Plans Australia) was incorporated in May 1996 (under the name ACBF Funeral Benefit Fund No 1 Pty Ltd). It changed its name to its present title in March 2005. It was the equivalent of ACBF Plans but was open to non-indigenous Australians.

4. The administration of the affairs of the member companies appears to have been entrusted to a company now called ACBF Funds Administration Pty Ltd (Administration) but earlier called ACBF Group Management Pty Ltd. The various members of the ACBF group were based in offices at Coolangatta, Queensland throughout the relevant period.

5. At all material times ACBF Group Holdings Pty Ltd (Group Holdings) held all the issued capital in each of the five member companies. Mr Ron Pattenden was the holder of all of the issued capital in Group Holdings up until July 2001 when 20% of the shares were acquired by Mr Mark Conry, who had, at that time, just been appointed chief executive officer of Group Holdings. Mr Conry remained the CEO until late 2004. Mr Pattenden repurchased the 20% shareholding on Mr Conry's departure.

6. Crown was incorporated in Vanuatu in April 2002. Mr Pattenden is, and has been at all material times, the controlling mind of Crown. I should say immediately that while the Commissioner was critical of some of Mr Pattenden's evidence I generally accept it. He was, it is true, an argumentative witness, convinced that the Commissioner was unfairly targeting him and his companies and equally convinced that the insurances offered by "his" companies were far superior to those offered by mainstream insurers. Whether he is correct in either or both of those beliefs is not a question I need concern myself with but, as I say, I regard his evidence as reliable, despite his tendency to make speeches in answer to questions in cross-examination and to frequently argue with counsel for the Commissioner.

7. It is convenient to make reference to various witnesses called by Crown who were ACBF employees or who otherwise had dealings with it. By and large their evidence was not controversial and, except where otherwise stated, I see no reason to doubt the reliability and accuracy of the evidence of these witnesses.

8. Mr Ken Alchin was, and remains, the internal company accountant of Group Holdings and its many subsidiaries. He became a director of some of the companies in 2001 and of the remainder in 2004. Mr Craig Duly is the external accountant for the various ACBF companies. He has acted for Mr Pattenden and his companies since 1994. Ms Renee McFadyen first commenced with ACBF in October 1995 and more recently has held senior positions in the management of the companies as well as being a director of many of them. From 2008 she, together with Mr Alchin and Ms Kellie McCallie, has comprised the management team for the various companies. Ms Shar Tucker was an employee since 1998. In 2004, following the resignation of Mr Conry, she became the CEO of the ACBF companies and became a director of many of them. Between late 2004 and 2008/2009 Ms Tucker was involved romantically with Mr Pattenden. In August 2005 she acquired shares in Crown from Mr Pattenden and was appointed a director of Crown at that time.

9. Mr Bruce Thomson was an actuary who was engaged to provide advice to Fund 2 about the capacity of Crown to adequately insure the risks of Fund 2. Additionally, he proffered various opinions on the nature of the relationship between Crown and the various ACBF companies and provided a commentary on the opinions of Ms Rhonda Virtue, a witness called by the Commissioner to give opinion evidence regarding matters of insurance. As will appear, I did not find any of the opinion evidence of any great assistance however I have no reason to doubt the reliability of Mr Thomson's evidence of matters of fact. Mr Jonathan Law is a partner in Hawkes Law, Chartered Accountants of Vanuatu (formerly KPMG Vanuatu). Mr Law assisted in the creation of Crown, audited its accounts annually and provided secretarial services from time to time. Again I have no reason to doubt the accuracy of his factual evidence.

A short history

10. The following background is largely taken from Mr Pattenden's affidavit. In the early 1990's Mr Pattenden had the idea of setting up a fund to provide money for the funerals of people in the aboriginal community. The original fund, Fund 1, received periodic contribution from persons who became members and, on the member's death, benefits were paid out of the fund to the member's next of kin.

11. Problems arose with the New South Wales Department of Consumer Affairs. Fund 1 was not registered under the Funeral Funds Act 1979 (NSW) as it ought to have been. Proceedings for an injunction were taken against ACBF by the Department of Consumer Affairs. Eventually, in December 1993, Fund 1 obtained an exemption from the application of the Funeral Funds Act.

12. In the meantime those problems led to the creation of Fund 2 by deed dated 9 May 1993¹. ACBF No 2 was, and remained, the trustee of Fund 2. The deed obliged the trustee to maintain a group life policy in respect of the lives of the members of the fund for not less than the benefits payable to the next of kin of members in the event of death. From November 1993 the insurer was National Mutual Life Association of Australasia Limited (and subsequently AXA Limited when that company took over National Mutual). The terms of the membership agreements and the insurance policy are examined in greater detail in paragraphs [26] to [31] below.

13. The difficulties with the Department of Consumer Affairs were resolved and Fund 1 resumed operations but only for pre-existing members; new members joined Fund 2.

14. By 2000, Mr Pattenden was concerned about the time that AXA was taking to process claims. AXA too had its own concerns and by March 2001 was of the view that,

"… continuing the relationship between AXA and ACBF will not be in either AXA's or ACBF's, or more importantly in the ACBF members' best interests."²

Following receipt of this and subsequent correspondence Mr Pattenden sought assistance from other insurance companies. None were apparently interested. At the suggestion of his solicitor and his accountant Mr Pattenden started to investigate the possibilities of establishing an Australian insurer. That required net assets of $5m, which Mr Pattenden did not have, so it was suggested to Mr Pattenden by the accountants that he had consulted that an insurance company be established in Vanuatu where capital of $200,000 was required.

15. Around this time Mr Pattenden commenced taking a less active role in the operations of the ACBF group entities. In early 2001 Mr Conry was appointed chief executive officer of the ACBF group. In July 2001 Mr Pattenden sold a 20% interest in Group Holdings, the ultimate controlling entity, to Mr Conry. The extent of Mr Pattenden's role in the ACBF companies thereafter is controversial however I accept his evidence that his later involvement with the ACBF companies was limited to giving advice and assistance when it was sought, not the giving of directions or commands.

16. In October 2001 Mr Pattenden travelled to Vanuatu for the purpose of making further enquiries about obtaining an insurance licence in Vanuatu. He met Mr Law, then a director of KPMG Vanuatu. On 8 November 2001, and on Mr Pattenden's instructions, Mr Law arranged for a company, Regal Corporate Services Limited, to be incorporated in Vanuatu. Mr Pattenden deposited funds into a bank account in that company's name in Vanuatu. Then in January 2002 Mr Pattenden put in train the steps to incorporate Crown and to obtain an "exempted insurer" licence under the Insurance Act of Vanuatu.

17. On 11 January 2002 Mr Pattenden executed an application for an exempted insurance licence. The application described Mr Pattenden as "the sole and ultimate beneficial owner" of all of the share capital of the proposed company. The "business plan", lodged in support of the application, contains a useful description of the method of operation of the various companies and the way that it was proposed that Crown operate in that context. It described the work of the ACBF entities and the proposed company in this way:

"ACBF Group Holdings Pty Ltd provides Funeral Benefits to the Aboriginal community (indigenous Australians) in Australia.

ACBF Group Holdings Pty Ltd, manages the servicing of this niche client market under the terms of the Aboriginal Community benefit Funds Compliance Program. This document provides clear and transparent details of the structure and operation of the program, including roles, reporting, policies, procedures, complaints, feedback, monitoring and audit procedures. A copy of the program is included in this application under the section Background Information - Associated companies, ACBF Group Holdings Pty Limited, along with a copy of the company's Profit and Loss Statement 1 July to December 2001 and Financial Statement for the year ended 30 June 2001. A diagram of the group structure is shown at Annexure A to the Compliance Program.

The Group's membership is around twenty three thousand. Whilst around eleven thousand are legislated under a Funeral Fund Act and is self funding (Number 1 Fund), in contrast around twelve thousand (Number 2 Fund) of the memberships benefits are underwritten by way of a Group Life Policy with a major Insurance International Company. Copies of the respective trust deeds for each fund and financial statements for the year ended 30 June 2001 are also included in this application under the section Background Information - Associated companies Aboriginal Community Benefit Fund No.1 and No. 2.

Mr Ron Pattenden is the Chairman of the group, majority shareholder (80%) and managing director of the companies and (public) trustee of the trusts.

Underwriting Business

In respect of the Number 2 Fund business, an agreement with the underwriters provides for contributions to be made based on the exact number of members and a formula is used to determine a bonus refund after pay-outs for claims are met.

Since 1994 membership has grown from zero to the said around twelve thousand, this now results in the group sending on average over the past two years just under AUD$90,000 per calendar month or over AUD$1M per annum. The proven death claim rate, based over a seven year period, runs at around 19% and the Bonus refund at around 48%, the balance of around 33% is profit to the underwriter. This would represent around a AUD$300,000 per annum gross profit.

It is proposed that Regal Insurance Services Limited will replace the existing underwriter and provide captive insurance services.

Mr Ron Pattenden will be the Managing Director and responsible for the day to day management of this company.

Two major factors behind the setting up of an offshore underwriter are:

Firstly of course to retain the existing profit margins being earned by the present underwriter to supplement further future growth and financial security.

Secondly and more importantly to put the group in the position of being able to determine death claims payable, without waiting for sometimes extremely long periods of time whilst the present underwriters claims officer procrastinates over what should be paid and what should not, bearing in mind 90% of the claim pay-out is deducted from the groups bonus monies.

This can result in some cases the members next of kin waiting up to and sometimes past six month before the claim is processed and paid, remembering, the group is trying to provide funeral cost cover for members, whereby sometimes monies are urgently required to pay Funeral Directors to provide the service. Some do not without payment.

It is envisaged Regal Insurance Services Limited will establish an office in Port Vila building and hire local staff to handle documentation and liaise with the group in Australia."

18. Crown was incorporated (under the name Regal Insurance Services Limited) on 9 April 2002. It changed its name to its present title later that same month. It is relevant to note that according to its memorandum of association Crown had power,

"(1) To carry on all kinds of insurance business including funeral benefits, to solicit and place insurance provided that the company shall not be empowered:-

 (a)  To insure any risks within the Republic of Vanuatu.

 (b)  To solicit insurance business from the public within or beyond the Republic of Vanuatu."

19. Mr Pattenden returned to Vanuatu in April 2002. He met with Mr Law and Mr Geoffrey Gee, a local solicitor. Between 16 and 22 April 2002 he worked in Vanuatu putting together a proposal for insurance to be given to the ABCF companies. He spoke to Mr Conry and to the Australian solicitor who had acted for him for a number of years, Mr John Hanna. Mr Pattenden returned to Australia on 22 April 2002 having, he said, completed the proposal documents which, if executed by an ABCF company and returned to Crown, would constitute an offer by that company to enter into a contract with Crown on those terms. In the meantime ACBF No 2 had sought, and on 23 April 2002 obtained, advice from Mr Thomson (the actuary) about the minimum solvency capital that should be in place for an insurer (Crown) based in Vanuatu if Fund 2 were to place its death risks with Crown. Mr Thomson suggested that enquiries ought be made to source or place such business with an Australian insurer to ensure that Crown's offer was at least as good as that available elsewhere.

20. On 24 May 2002 a meeting of the directors of ACBF No. 2 was held at its offices in Coolangatta. Present at the meeting were Mr Pattenden, Mr Conry, Mr Alchin and Ms Di Stokes (an employee of the ACBF group). At the outset of the meeting Mr Pattenden and Mr Conry were the only directors of ACBF No 2. During the meeting Mr Pattenden resigned as a director. Then he and Mr Conry, presumably as the members of ACBF No.2, resolved that Mr Alchin be appointed a director. Mr Alchin consented to that appointment. The directors then considered the merits of the proposal presented by Mr Pattenden on behalf of Crown and resolved to terminate the AXA group policy with effect from the close of business on 31 May 2002 and to enter into arrangements with Crown to provide a substitute group life policy effective upon termination of the AXA policy. The proposal to Crown was executed under the common seal of ACBF No. 2 on 24 May 2002.

21. On the same day ACBF White 2³ executed a similar proposal to Crown on behalf of White Fund 2.

22. Mr Pattenden took the executed proposals with him at the conclusion of the meeting and, on his return to Vanuatu on 9 June 2002 executed the two policy documents on behalf of Crown.

23. Crown paid the first claim made on Fund 2 on 14 June 2002. Since then (and to May 2011 when Mr Pattenden's affidavit was sworn) Crown has paid in excess of 600 claims. And, as Mr Pattenden said frequently, it paid them promptly. At the outset Crown remitted funds in payment of claims back to the ACBF companies by international bank transfer, however in July 2002 Crown set up an imprest account⁴ for Fund 2 claims. From July 2002 to 30 June 2006 ACBF 2 accounted to Crown on a monthly basis, remitting to Crown the premiums received from members less the amount of claims paid out. From 1 July 2006 that process was altered such that Administration remitted to Crown all premium income and Crown remitted funds to Administration sufficient to reimburse the imprest account for claims paid.

24. When National Mutual, and then AXA, was the insurer of the ACBF companies it shared a percentage of the excess of premiums over claims with the ACBF companies in accordance with the formula 0.80(0.70P - C) where P represents the premiums paid by members and C the claims paid out. The result of the application of that formula was that AXA paid to the member companies 80% of the excess of 70% of premiums less claims. It retained 30% of the premium income to defray its costs of administration and retained the other 20% of the surplus amount. That continued when Crown took over the role that AXA had occupied however the formula was varied to 0.90(0.60P - C). On a quarterly basis the member companies calculated 90% of the excess of 60% of premiums less claims and that amount was paid by Crown to the member companies once Crown had approved the calculations and the payment. The practice, according to Mr Alchin, was unchanged from that which occurred when National Mutual and AXA were the insurer.

25. In October 2003 the Australian Securities and Investments Commission commenced proceedings against ACBF and ACBF No. 2. The detail of the proceedings is not relevant however the result of the proceedings was the creation of two new funds controlled by Plans and by Plans Australia. On 4 January 2005 Plans executed a "proposal for group insurance policy" and provided it to Crown. Plans Australia executed a similar proposal on the same day. Crown accepted the two proposals on Mr Pattenden's return to Vanuatu on 31 January 2005.

Fund Membership

26. I propose to examine the terms and conditions of fund membership by reference to Fund 2. I did not understand either party to suggest that the terms and conditions of other funds were materially different. But it is important to note that in no case was there any relationship between Crown and individual; members; the relationship was between the member company and the member.

27. Fund 2 was constituted by a trust deed dated 9 May 1993⁵. It provided for membership of the fund by members of the Aboriginal community who might apply for membership by completing an application. Members were required to make periodic contributions and, on the death of the member, the trustee (ACBF No 2) was obliged to pay to the next of kin of the member the amount specified in the application for membership ($6000). No benefit was payable in the event of death by suicide or as a result of intentional self-injury nor in the event that the group life policy insurer did not pay the trustee in respect of that member's death.

28. Clause 13.5.1, headed "Duty to Insure", 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 for not less than the total benefits payable to the Members. For this insurance aspect, the Trustee is currently utilising National Mutual Life Association of Australasia Limited as underwriters for the full death benefits payable. The Trustee may in its discretion change the insurer at any time. The Trustee shall, if requested by a Member, advise the Member the name of the insurer from time to time."

By virtue of clause 13.5.2 the trust terminated if the insurer terminated, or refused to renew, the group life policy and group life cover could not be obtained from another insurer.

29. The application form required the applicant to disclose a range of serious ailments e.g. heart conditions, strokes, cancer etc., any ongoing illnesses in the preceding five years and any current medications. Reference was then made to "guidelines" made by the ACBF entities to determine eligibility for membership and, where appropriate⁶, the level of membership. According to Mr Alchin, decisions on acceptance of membership were made by the ACBF entity although on some occasions clarification was sought from Crown, as it had been from the previous insurers⁷.

The policy of insurance

30. Again, in the absence of any suggestion of any relevant difference between the policy documents for the various funds, I propose to consider only that relating to Fund 2. The policy document is a single page document, executed by Mr Pattenden on behalf of Crown, but which incorporates the eight page proposal executed by ACBF No 2 on 24 May 2002. There is an issue concerning Mr Pattenden's execution of the policy document which is dealt with in paragraphs [59] to [61] below.

31. The policy was expressed to commence on 1 June 2002. The benefits insured under the policy were granted by Crown to the proposer. Clause 8.2 provided:

"8.2 If the appropriate premiums have been duly paid and if the death of a person who is then an insured person is established to the satisfaction of Crown Insurance, then subject to anything to the contrary arising pursuant to this proposal, the relevant sum insured (calculated at the date of death) shall be payable."

No benefit was payable in respect of death from suicide or as a consequence of intentional self harm.

32. Premiums were determined by reference to an amount per fortnight per insured person. An insured person was an eligible person who had become an insured person pursuant to clause 6.1 and who had not ceased to be an insured person. Clauses 6.1 and 6.2 provided:

"6.1 The proposer will include in any membership application form relating to Aboriginal Community Benefit Fund No 2 and obtain from each eligible person a health statement in such form as is determined by Crown insurance from time to time, provided that Crown Insurance will not change the form of the health statement without giving the proposer at least one month's notice.

6.2 Crown Insurance will determine whether or not each eligible person is an insured person on the basis of the contents of the eligible person's health statement and shall make such determination in accordance with guidelines of which it shall give the proposer prior notification. Special basis may specify restrictions or conditions relating to risks insured and/or amount of cover and/or may specify special premium arrangements. Each special basis so determined shall be advised to the proposer by Crown Insurance."

The claims process

33. As I have said, Mr Pattenden, (and other ACBF witnesses), was critical of the delays that had occurred in paying claims by the previous insurer. The delays, and the not infrequent refusals to pay claims, caused the reputation of the ACBF funds to suffer⁸. Seemingly, Mr Pattenden wanted to ensure that no similar problems arose with Crown.

34. Claims were made, in the first instance, to the member company. Clause 10 of the policy required the member company to arrange for Crown to be notified as soon as practicable,

"…of particulars of any event or other occurrence which may entitle [the member company] to claim a benefit under the policy. Upon receipt of such notification, Crown … shall promptly make known it's [sic] requirements for effecting payment of the claim."⁹

35. The member company would, generally, compile a file of relevant documents comprising evidence regarding the fact and cause of death, membership application forms and the medical history of the claimant. This information was forwarded by the ACBF company to Crown (by facsimile) with a covering letter, signed by Mr Alchin. The letter (of three pages) enclosing the first claim in the three folders of claims¹⁰ is a good example of the common form of such letters. The first page read:

"We submit the claim for your decision.

We have attached copies of the following file documentation: membership application form, increase applications, letter, health and/or personal statements and medical certificate.

Could you please advise us if you will authorise the payment of the claim and for what amount?"

The next page contained a hand written "recommendation" from Mr Alchin in which he asked whether Crown required any further investigation into the history of the condition that caused the member's death. The final page of the covering document provided Crown with the opportunity to approve payment by placing an "approved" stamp on the document. In this particular case it did so, seemingly on the day the claim was forwarded by Fund 2.

36. It was Mr Alchin's practice to satisfy himself that claims made were in order. As a rule, the member company would not send a claim on to Crown unless it was satisfied that all pre-conditions for payment had been met. Conversely, the member companies would not forward claims where the death was suicide since the policy did not respond to death from suicide.

37. It is evident from the material that very few claims were refused and that Crown authorised the payment of claims promptly. Given the profitability of the business, the modest amount of the payout and the size of the communities from which the claims (and thus potential new members) were coming it made sense to do so and to do so even where there might be some doubt about the strict legal entitlement to a payout. That philosophy seems to have motivated Mr Pattenden's approach to the payment of claims.

The Returns and Assessment Process

38. Despite being incorporated in Vanuatu Crown lodged returns for each of the 2004, 2005, 2006 and 2007 income years. The returns for the first three of those years were lodged on 6 May 2008; that for the 2007 income year was lodged on 18 September 2008. Assessments of Crown's taxable income for the 2004 to 2006 income years were made on 14 May 2008 and for the 2007 income year on 23 September 2008. The taxable income of Crown, as assessed, was:

2004	$ 561,668
2005	$ 673,276
2006	$1,077,957
2007	$1,817,845

39. Crown objected to its assessment by a notice of objection dated 17 November 2008. The Commissioner wholly disallowed the objections by letter dated 5 July 2010.

Legislation

40. Two broad issues arise in the proceedings - was Crown a resident of Australia for any of the years in issue or, if it was not, did its income in those years have its source in Australia.

41. It is common ground that Crown was not incorporated in Australia. Accordingly, the only part of the definition of "resident" or "resident of Australia" in s 6 of the Income Tax Assessment Act 1936 (the ITAA 1936) which is relevant is as follows,

"(b) a company which … not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholder who are residents of Australia."

The Commissioner does not put his case on any basis involving voting power. Thus, the two questions that arise for determination of residence are,

  ♦  did Crown carry on business in Australia during the relevant years;

  ♦  did Crown have its central management and control in Australia during the relevant years.

The requirements are cumulative.

42. Regardless of the question of Crown's residence it will be necessary to consider the source of Crown's income. That is the consequence of s 6-5 of the Income Tax Assessment Act 1997 (the ITAA 1997). It provides:

"(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

(3) If you are a foreign resident^[11] your assessable income includes:

 (a)  the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

 (b)  other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source."

Thus whether Crown is a foreign resident or an Australian resident it is necessary to consider the source of its income.

Residence

Did Crown carry on business in Australia?

43. Crown contends that it does not carry on business in Australia. It is in the business of reinsurance and it conducts that business in Vanuatu, not Australia. It stresses the separation that exists in fact and in law between Crown and the member companies.

44. The Commissioner contends to the contrary. In reality, says the Commissioner, Crown is a captive group insurer whose business is inextricably interwoven with that of the member companies. It is said that the member companies, as Crown's "administrators" in Australia, carry on the insurance business by which the premium amounts are derived¹². But the Commissioner does not suggest that Crown is merely a façade or that any reason exists to ignore the ordinary legal distinctions between separate legal entities.

45. Both sides emphasise that the question is one of fact and degree that depends upon a consideration of all the evidence. Having considered that evidence I am satisfied that Crown did not carry on business in Australia.

46. I am not as convinced as the parties seemed to be of the importance of fixing a label - insurer or reinsurer - to the activities of Crown. There are some aspects of each in what Crown does and, in any event, the revenue law consequences flow from the application of facts as found rather than from any classification into insurer or reinsurer.

47. Consequently I found the evidence of Ms Virtue, Mr Ryan and Mr Thomson (insofar as he expressed similar opinions) of limited assistance. Thus, Mr Ryan describes a reinsurance relationship as one,

"… where the insurer passes off risks to a reinsurer in circumstances when excessive claim amounts are anticipated or by prior agreement."

That certainly is one type of reinsurance but I would not consider it to be the only type of reinsurance. The type of arrangement in issue in Tariff Reinsurances Ltd v Commissioner of Taxes (Vic)¹³ was not an "excessive claim" treaty yet it seems not to have been doubted that it was one of reinsurance. The essence of reinsurance, I would have thought, is the laying off of risk by one insurer to another.

48. Similarly, Ms Virtue's evidence¹⁴ about the practices of group insurers is likely to be entirely correct but irrelevant in circumstances where Crown has, in effect, assumed the role of AXA. National Mutual (or AXA) had done the preparatory work including the work of determining premiums and setting the policy terms. Crown, by Mr Pattenden, was well aware that the role of the insurer had been a profitable one. There was no reason to think that that position might change if Crown took over the role of AXA. That, in my view, is what it sought to do and what it achieved. It differed from AXA only when it came to claims; Crown was not concerned, as Mr Pattenden says AXA was, to find reasons not to pay a claim.

49. Ultimately, I conclude that Crown was an insurer but the member companies were as well. Crown (with the member companies) and the member companies (with the members) entered into contracts whereby, in consideration of the payment of sums of money during the currency of the contract (premium) the insurer would make a payment upon the happening of a specified event involving an element of uncertainty¹⁵. I find it unnecessary to determine whether a contract that lays off all of the risks of one insurer to another is a contract of reinsurance.

50. The Commissioner, by reference to the evidence of Ms Virtue, identified the essence of Crown's insurance business as including,

(a)  the acceptance and pricing of the insurance risk;

(b)  the preparation of the group insurance proposal;

(c)  preparation and issue of policy documentation including the assessment of applications for insurance cover received from eligible persons taking into account factors such as the health of the eligible person;

(d)  installation of the group insurance on the data system;

(e)  invoicing and receipting of deposit and periodic premiums;

(f)  conducting annual reviews on receipt of requested membership information; and

(g)  assessment of claims under the group insurance policy.

These functions, the Commissioner submits,

"[were] carried on in Australia through the agency or administrative function of the ACBF Group entities."

I do not agree.

51. First, it is apparent that the business model put forward is undoubtedly accurate for AXA or similar mainstream insurers. But Crown was never going to fit that model. Crown adopted, and adapted, the model created by National Mutual and AXA such that it did not need to undertake many of the steps that Ms Virtue referred to. Crown did not need to price the insurance risk. Nor did it need to undertake an independent risk assessment. Mr Pattenden already knew that the business was profitable at the level of premiums and benefits used when AXA was the insurer. Mr Pattenden prepared a group insurance proposal and prepared and issued a policy by adopting the existing documents. And it needed to undertake no study of the health of eligible persons; that study had been done by the years of experience that Mr Pattenden had.

52. The Commissioner submits that Crown was obliged to prepare and issue membership application forms, health statements, guidelines and claim forms. I do not see why that should be so. The members were not joining Crown, they were joining the member company. The forms identified by the Commissioner are prima facie concerned with the relationship between the member company and the members. Health guidelines had been prepared by the member entities and were relied upon by those entities to determine whether a member's application would be accepted or rejected. On a very few occasions reference was made to Crown where there was doubt whether the applicant's health was acceptable but by and large the member companies made these decisions in the first instance.

53. As it seems to me the Commissioner's submissions fail to acknowledge the terms of the contracts between the member company and the member. The ACBF entity was obliged to maintain a group life policy in respect of the lives of the members but it was not obliged to pay the benefit in the event that the insurer did not pay the member company in respect of that member's death. Thus Crown, and no doubt AXA and National Mutual before, had no interest in membership applications or health statements at any time prior to the making of a claim. Subject to any question of misleading or deceptive conduct the member companies were at liberty to accept new members on the basis that there were no benefits payable for the benefit of the member if the insurer did not pay.

54. There is, as the Commissioner submits, no evidence that Crown maintained a data system or contracted with any other entity to provide one but I did not understand Ms Virtue to suggest that a data system, recording all members, was necessary. Nonetheless Crown had records of the policies that it entered into; I would not have thought that any greater degree of formality was required.

55. Crown maintained its own accounts and self-evidently proposed (and had audited) its annual accounts. I see no reason to infer that it did not maintain financial records sufficient to adequately record its financial affairs. The notion of invoicing and receipting premiums is somewhat incongruous in an arrangement such as the present where Crown were paid the premiums and shared surpluses with the member companies.

56. In my opinion the business of Crown was confined to the entry into the various contracts with the member companies whereby in consideration of the payment of the premiums, Crown agreed to pay the defined benefit to the member company. Crown was not concerned, in a contractual sense, with the payment of the defined benefit for the benefit of the fund member.

57. The external indicia of Crown, its registered office and its business premises, were all situated in Vanuatu. Its accounts were prepared in Vanuatu, from primary documents held in Vanuatu and audited by auditors in Vanuatu as was required by the laws of Vanuatu. Company meetings were conducted in Vanuatu and all of its corporate and financial records were maintained there. Necessarily, none of those matters were, or took place, in Australia.

58. If, as I conclude, the business of Crown was the entry into the various contracts with member companies and the performance of those contracts it is not possible to find any Australian element to that business beyond the presence in Australia of the various entities insured under those contracts. All of the proposals were prepared by Mr Pattenden on his lap top (albeit copied in substance from the National Mutual policy documents) and executed for Crown in Vanuatu.

59. There is an issue between the parties about the formation of the contracts between Crown and ACBF No.2 and ACBF White 2. Crown says that the proper contractual analysis of the events is that it is an example of the third category in Masters v Cameron¹⁶ that is,

"… the case…in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract".

The Commissioner says that it is an example of the first category, that is,

"… one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect."

60. The notion that the present case is a "first category" case may be readily rejected. There was no need to restate the terms of a bargain in a fuller or more precise way. If there was to be a bargain, its terms were completely determined. At the conclusion of the meeting on 24 May 2002 what remained to be done was for Crown to accept the proposals. It may well have been a virtual certainty that Crown would accept the proposals and that, thereupon, contracts would come into existence however I am well satisfied that Mr Pattenden was sufficiently astute to go out of his way to ensure that there was no acceptance in Australia. He was, I infer, conscious of the restrictions on carrying on business as in insurer in Australia without appropriate approvals. The entire arrangement was structured to ensure that Crown did not accept the proposal except in circumstances where the acceptance occurred in Vanuatu.

61. In these circumstances I need not deal with Crown's detailed submissions designed to demonstrate that Mr Pattenden lacked authority to bind Crown. I am satisfied that Mr Pattenden was at pains to ensure that Crown only accepted the various proposals in Vanuatu and that it, in fact, did so.

62. If the contracts that were the basis of Crown's business were made in Vanuatu it remains to consider where performance of those contracts was undertaken. There are two essential elements of performance of those contracts - the receipt of premiums and the payment of claims.

63. Premiums were paid to Crown in Vanuatu by the member companies. They were paid net of claims paid but I do not regard that practice as having any particular significance; to effect a set off was sensible for both parties. The approval of claims by Crown was perfunctory yet the material satisfies me that Crown was required to, and did, approve the payment of claims. In the situation where the member company was dealing directly with the representative of the deceased member in order to obtain the information necessary to progress the claim on to Crown, I see nothing untoward in Mr Alchin (or another ACBF employee) satisfying himself that the claim was in order and making a recommendation to Crown about the payment of the claim. I accept that, ultimately, that decision was made by a representative of Crown in Vanuatu.

64. The Commissioner submits that Mr Alchin played a role in determining claims. That conclusion was said to be evidenced from the fact that claims were not forwarded to Crown where the cause of death was suicide. I cannot see how that suggests, even remotely, that Mr Alchin (or an ACBF company) played any role in determining claims. Suicide was expressly excluded; there was no point in a member company submitting such a claim as it was bound to fail.

65. The Commissioner was also critical of the perfunctory checking of claims by Crown. It appears to be the case that Crown paid out on, for all practical purposes, 100% of claims submitted. Mr Pattenden said this,

"The difference between Crown Insurance Services in Vanuatu and the likes of National Mutual and AXA and Suncorp and all the other insurance companies that you can think of, is that Crown looked forward to paying money out. It didn't really go to the depths of questioning everything to find out a reason not to pay, so we were very pleased - Crown was very pleased to pay out, and the more the better, because we were, initially, trying to repair our bad PR with AXA, of course. And it continued thereafter. So there wasn't all this investigation into why - let's find a reason why we shouldn't pay. Crown was happy to pay."

66. The evidence of Mr Ryan, relied upon by the Commissioner, was that it was,

"…unusual for there to be 100% of claims paid out. This usually means a poor management of claims such as not checking the claims."

It may be doubted whether the opinion expressed is one open on the evidence available to Mr Ryan however I do not accept that that was the case here. The rate of claims paid out was attributable to both Crown's attitude of being "very pleased to pay out" and the practice of the member companies of not forwarding claims that were bound to be rejected. I do not accept that it was attributable to an absence of checking.

67. It follows that I reject the Commissioner's submission that Crown's role in the claims process was that of a mere "rubber stamp" to the work undertaken by the member companies in Australia. I am satisfied that Crown made the decision on whether to pay a claim, not one of the member companies.

68. I am then satisfied that Crown did not carry on business in Australia during the relevant years.

Central management and control

69. The Commissioner's case is that during the years in question Crown had its central management and control in Australia. It points to the fact that Mr Pattenden, who was a director throughout the period, spent more time in Australia than in any other country. A similar submission is made in relation to Mrs Tucker who was a director from August 2005 to August 2007. But beyond that the Commissioner points to little else. Reference was made to a statement by Mr Pattenden in earlier proceedings as follows,

"We had discussed the whole set up of Crown with my solicitor, with Craig Duly, with a government approved actuary and other business partner and the whole idea was formed in several meetings and the idea of setting up Crown to cater better for ACBF than AXA was doing was formed there, yes."¹⁷

That evidence, it is said, demonstrates that Mr Pattenden exercised strategic control over Crown while in Australia. How Mr Pattenden exercised strategic control over a company which did not then exist was never made clear to me. I reject the notion that the fact of the meetings says anything about the location of the central management and control of Crown.

70. Then it was said that the group policies were the result of copying much of the content of the National Mutual policy "held on the files of the head office of the ACBF group at Coolangatta." So much may be accepted. But the work of preparing the final document was not undertaken at Coolangatta and, more importantly, acceptance of the proposals occurred in Vanuatu, not Australia.

71. Finally, reference is made to Mr Pattenden making "major policy decisions." In an email dated 29 November 2006 Mr Paul Hewitt, who was employed from January 2005 to early 2008 as sales manager, referred to having,

"…spoken to Ron who has received approval from Crown to undertake work in this shire."

Mr Hewitt was not able to recall the subject matter of the conversation. Mr Pattenden could recall a conversation about the area in question but denied that he ever gave "approval" or permission for Mr Hewitt to do anything. But in any event I find it impossible to see how the evidence touches upon the question of Crown's central management and control.

72. The Commissioner submits that Crown does not have a business separate to those of the member companies and that Mr Pattenden's continued involvement in the business of the member companies is indicative of strategic management and control of Crown. I do not accept either premise of the submission.

73. I do not accept the proposition that Crown was as the Commissioner put it, "a division of the ACBF Group." It had a separate legal entity, a separate business and it carried on its business under the control, in the main, of Mr Pattenden and later Ms Tucker. I accept Mr Pattenden's evidence that he was at pains to remove himself from the operations of the member companies from July 2001. That evidence was corroborated by the other ACBF employees. I accept that Mr Pattenden was instrumental in having Mr Hewitt appointed to his position and that Mr Pattenden attended the Coolangatta offices from time to time. But Mr Pattenden was the majority shareholder of the member companies and had had decades of experience with the companies. It was in his personal interests to ensure that someone in whom he had confidence (Mr Hewitt) was appointed as sales manager. Equally, it was in his personal interests to catch up with Mr Alchin and other staff members from time to time and to provide advice and assistance where it was sought.

74. I am satisfied that Crown did not have its central management and control in Australia during the years in question. Were it necessary to reach a conclusion on where central management and control was, I would have no hesitation in concluding that its operations were controlled and directed in¹⁸ Vanuatu. It was incorporated in that country, it held its directors' meetings in that country, its accounts were prepared, kept and audited in that country, its employees or agents resided in that country, the insurance contracts that were the basis of its business were made in that country and decisions or claims under those policies were made in that country. But it is sufficient to say that none of those activities are undertaken in Australia.

75. It is not to the point that Mr Pattenden and at a later time Ms Tucker, did not reside fulltime in Australia. He, and later Ms Tucker, did not control or direct the operations of Crown while they were in Australia.

76. I am then satisfied that Crown neither carried on business in Australia nor had its central management and control in Australia and that, accordingly, it was not an Australian resident during any of the income years in issue.

An Australian Source

77. The terms of s 6-5 of the ITAA 1997 have already been noted. If Crown is a foreign resident (or not an Australian resident) its assessable income includes ordinary income derived from Australian sources. It is common ground that Crown's income was ordinary income and that its income was derived. The question is whether it was "derived from a source in Australia for the purposes of" the ITAA 1936.

78. Both Crown and the Commissioner made reference to Tariff Reinsurances Ltd. (supra)¹⁹ The appellant in that case was a company incorporated in England which carried on business as a reinsurer. It entered into a treaty of reinsurance with a Victorian motor vehicle insurer by which it would reinsure two-thirds of the risks insured by the Victorian insurer in consideration of payment (into a bank account in Melbourne) of two-thirds of the gross premiums, less certain deductions. In a passage to which the Commissioner drew my attention Latham CJ said,²⁰

"In order to determine whether the profits are derived in or from Victoria it is necessary to ascertain what the taxpayer does in order to obtain the profits in question."

79. For his part the Commissioner focuses upon the original source of Crown's income, premium amounts received directly or indirectly by the ACBF group entities in Australia, from fund members solely in Australia, after management fees and other expenses have been deducted by the ACBF group.

80. The Commissioner illustrates that submission by reference to the 2004 income year. In that year Crown had gross income of $1,394,756, comprising interest of $6,337 and premiums of $1,388,419²¹. The amount of $1,388,419 is described as premiums received in Crown's audited financial statements for the year ended 30 June 2004. For the financial accounts of ACBF No. 2 for the year ended 30 June 2004 expenditure of $1,388,419.65 is described as "underwriter payments"²²

81. Then the Commissioner makes reference to an analysis of premiums and claims prepared by Mr Alchin, internal accountant for the ACBF group. For the period from September 2003 to November 2003, premiums of $108,224.10 were paid to Crown for the month of September 2003, $125,574.30 for October 2003 and $106,103.25 for November 2003. But, at least during the initial years, the gross premiums were not remitted to Crown in Vanuatu; what was remitted was an amount net after claims and some bank costs had been deducted. Thus for the month of September 2003 (where premiums totalled $108,224.10) an amount of $81,196.24 was credited to Crown's account at the ANZ Bank Vanuatu. The difference comprises claims paid totalling $27,000 and bank charges of $28.00.

82. The Commissioner's submissions focus upon the fact that the original source of the amounts remitted to Crown was the payments by members in Australia. So much may be accepted. But the policy holders in Tariff Reinsurances were the original source of the amounts received by that company. The Commissioner submits that the decision in Tariff Reinsurances is distinguishable. Crown is not a reinsurer of insurance risk (as Tariff Reinsurances was); its position, the Commissioner submits, is analogous to that of the Victorian insurance company in Tariff Reinsurances. I do not regard the case as distinguishable on that basis. The case is not authority for such a simple proposition. The case emphasises that regard must be had to the substance of the transaction i.e. what did Crown do to receive the income.

83. Next the Commissioner submits that the case is distinguishable because Crown receives the totality of the premium income from insurer persons. The submission is correct so far as it goes but I do not accept that such a finding is open on the whole of the evidence. The agreements between Crown and the member companies permits the sharing, in agreed proportions, of the excess of premiums over claims, a continuation of similar arrangements made with National Mutual and AXA.

84. Finally the Commissioner sought to distinguish Tariff Reinsurances on the basis that Crown's real connection as insurer is to Australia; its business as a "captive insurer" was to facilitate the business model of the member companies. As will be apparent from the earlier discussions regarding residence I do not accept that that was the proper characterisation of Crown's business.

85. The source of Crown's income was the insurance contracts with the various member companies. I am satisfied that the contracts were made in Vanuatu. And I have already concluded that those contracts were performed in Vanuatu, not Australia. I am then satisfied that Crown's income in the years in issue was not derived from sources in Australia.

Conclusion

86. In each application, the objection decision will be set aside and the matter remitted to the Commissioner with a direction that Crown's objection decision be allowed in full.

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1.  The copy of the deed in the material is undated; I have used the date given by Mr Pattenden in his affidavit at [6].

 2.  Exhibit 17, page 322.

 3.  Then known as Australian Consolidated Bereavement Fund No. 2 Pty Ltd.

4.   It was not entirely clear however I assume that the imprest account was held by Administration.

 5.  Exhibit 1, RP-1.

 6.  In the funeral plans for example.

 7.  See Exhibit 4, paragraph 28 and KEA - 6.

 8.  Exhibit 4, paragraph 7.

 9.  Exhibit 17, page 40.

10. Exhibit 16.

11. The Tax Laws Amendment (2004 Measures No.7) Act 2005, No 41 of 2005, substituted the words "a foreign resident" for "not an Australian resident" with effect from 1 April 2005. Nothing turns on the amendment.

12. Respondent's submissions at [36].

13. [1938] 59 CLR 194. See paragraph [78] below.

14. Exhibit 15.

15. Sutton, Insurance Law in Australia, 1.1

16. [1954] 91 CLR 353, 360.

17. Exhibit 17, page 2085.

18. C.F. Koitati Para Rubber Estates Ltd. v. Federal Commissioner of Taxation [1941] 64 CLR 241, 248.

19. [1938] 59 CLR 194.

20. At 205.

21. Exhibit 17, s 37 documents at p.110.

22. Exhibit 17, supplementary s 37 documents, Volume 4 at p.1536.

†AUSTRALIA - Australia - Vanuatu - Resident - Australian Income-tax Assessment Act, 1936 (Cth) - Australian Income-tax Assessment Act, 1997 (Cth)