The Acting Commissioner of Taxation has forwarded the following memorandum for advice:

Section 17A before amendment read as follows:

Where a fire insurance company carrying on business in Australia re-insures risks with a fire insurance company not carrying on business in Australia the income received by the company not carrying on business in Australia in respect of the re-insurances shall be deemed to be derived from a source in Australia, and the company carrying on business in Australia shall be deemed to be the agent of the company not carrying on business in Australia, so far as may be necessary for the purposes of this Act.

Under this section a number of assessments were made against a number of fire insurance companies as agents for companies not carrying on business in Australia in respect of re-insurance business. The method of business was for the Australian company to effect insurance, and, to cover themselves on part of the liability under the policy, to re-insure part of the risk with another company outside Australia and pay a premium therefor.

It has been contended that there is a doubt as to the validity of the section in question and also as to whether if it is valid any assessment is possible under it in view of the fact that the Australian company has not received income on behalf of the foreign company.

I shall be glad to be favoured with your early advice in the matter.

I do not think that the section in question is invalid. The section is undoubtedly within the power of the Commonwealth as far as regards reinsurances entered into in Australia, even though the reinsuring company did not carry on the ordinary business of fire insurance in Australia.

Where, however, the reinsurance is entered into outside Australia, it is very doubtful whether the Commonwealth has power to deal with the reinsurances.

The position is similar to that in which an Australian company sends goods to England for sale. The goods being bought in England by an English company, I do not think that it could be held for the moment that the English company was taxable on the profits made on the sale of the goods by it, merely because the goods were Australian goods and were sold to them by an Australian company.

After considering the section in question with other sections of the Act, I think a court would hold that the section only applied to reinsurance effected in Australia.

Regarding the second question as to whether the company in Australia as agent for the company outside Australia is liable to pay tax on the premiums, section 52 (e) of the Act makes the agent liable for the tax on the income received by it in its representative capacity.

If it has received such income, the agent company would be liable to pay tax on behalf of the principal company, but it does not necessarily follow that the receipt of premiums by the agent company is the receipt of income on behalf of the principal company.

In my opinion, the receipt of premiums by the agent company in Australia, which are subsequently remitted to the principal company outside Australia, does not constitute the receipt of income in a representative capacity within the meaning of section 52 of the Income Tax Assessment Act 1915-1916.

[Vol. 15, p. 170]