GIM5150 - Taxation of the investment return: investment gains: periods of account beginning before 1 January 2002: gains and losses on assets other than debt – mainly shares

The profits made by an insurer in turning over its investments held on current account are an integral part of its trading receipts.

Where it is an essential feature of the business of a financial concern to vary its investments and turn them to account, the profits or losses on such investments are to be taken into account in computing the trade profits.

No deduction is allowed, though, for any fall in market value below cost at accounting dates before any profit arises (nor would any increase in value be recognised) unless fair value accounting is used (see GIM5180).

The question whether a sale of an asset gives rise to a trading receipt has been considered by the courts over many decades. To some extent the point has been confused by the issue of whether the “realisation basis” applied. However, in the decided cases the contrast has not usually been between whether a profit arises on “realisation” or arises simply by the recognition of unrealised gain or loss in the accounts (e.g. on stock valuation).

The first case to consider the issue of a profit on sale of investments held by an insurer was in 1889 in Northern Assurance Co v Russell (2 TC at page 578), although without any supporting reasoning. That first appears in California Copper Syndicate (Limited and Reduced) v Harris, 5TC159, where the Lord Justice Clerk said (at page 166):

‘Enhanced values obtained from realisation or conversion of securities may be assessable where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business.’

Later cases confirming this principle include Frasers (Glasgow) Bank Limited v CIR, 40TC698, and General Reinsurance Co Ltd v Tomlinson, 48TC81.

This latter case is significant because Foster J. in the High Court thought that the Commissioners were “fully justified” in concluding that profits earned on a portfolio of investments were part of the profits of the company’s London branch. He added that he thought this “was in fact the only true and reasonable conclusion” - despite the fact that claims were normally met from money held in the bank, and the main reason for realising investments was simply to improve the portfolio.

In coming to this conclusion he cited with approval the Privy Council case of Punjab Co-operative Bank, Amritsar v Commissioner of Income Tax, Lahore [1940] AC 1055 and the Australian case of Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation [1946] 73 CLR 604.

There have been a number of cases in the Australian courts on this subject, and details of them are available from CT&VAT(Technical) Insurance Group.