Case A10

Judges:
AM Donovan Ch
JD Davies M
GR Thompson M

Court:
No. 2 Board of Review

Judgment date: 20 February 1969.

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A. M. Donovan (Chairman), J. D. Davies and G. R. Thompson (Members): The taxpayer company concerned with this reference claimed as a deduction in its return for the year of income ended 30 June 1965 an amount of £373 described as ``long service leave paid''. The Commissioner at first allowed this deduction as claimed, but, as a result of enquiries made, subsequently issued an amended assessment in which he reduced it by £310. To this reduction an objection has been lodged.

2. The relevant facts can be shortly stated. Until 30 June 1962 the taxpayer company baked and sold both bread and smallgoods. As from 1 July 1962 a reorganisation of its business took place. It continued to bake and sell smallgoods, but discontinued the manufacture of bread and put the sale of bread in the hands of a subsidiary company which drew its supplies from a third company, S Pty. Ltd.

3. Two employees of the taxpayer, who had been engaged mostly on the baking of bread, ceased working for it at the end of June 1962 and immediately took up employment with S Pty. Ltd. Neither at that time nor at any subsequent time was there any liability on the taxpayer to make any payments for long service leave in respect of these employees. However, during the year ended 30 June 1965 a director of the taxpayer caused enquiries to be made, and, as a result of what was subsequently recognised as incorrect information, believed that the taxpayer had a liability to S Pty. Ltd., or should make a payment to that company, in respect of long service leave to which those employees might ultimately become entitled. The accountant who acted for both it and S Pty. Ltd. quantified the amount at £310. He did this by taking, in respect of each employee, the proportion of the period of long service leave provided under the relevant legislation which the period of his service with the taxpayer bore to the statutory qualifying period of service and applying to the period of time thus calculated the employee's salary at 30 June

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ATC 53

1962. The amount of £310 calculated in this fashion was entered in to the current account of each company in the other's books as part of the end-of-year adjustments, but whether the entries were actually made before the end of June 1965 was not clear. Later, about October 1965, the taxpayer paid by cheque to S Pty. Ltd. the balance owing on the current account.

4. It is contended that the amount of £310 is deductible pursuant to sec. 51(1) of the Act. In the circumstances of this case, that can only be so if the sum in question was ``necessarily incurred in carrying on a business'' for the purpose of producing assessable income. On the most liberal view, the outgoing was not incurred until some time during the year ended 30 June 1965. The business then being carried on by the taxpayer was the production and sale of smallgoods. To this business the outgoing had no relevance and was not incurred in carrying it on. The only business to which the payment could relate, that of baking and selling bread, had been discontinued for some years and the deduction during the year ended 30 June 1965 of the outgoing incurred during that year is precluded on the authority of
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. 54 C.L.R. 295.

5. The matter is more clearly seen if the precise nature of the outgoing is recognised. It is quite erroneous to describe it as ``long service leave paid'' as was done in the return of income. The amount in question was simply an ex gratia payment. That it may have been made under a mistake does not alter its character. In this context it is seen to have had no relevance to the taxpayer's current business or income producing activities. Lacking this nexus, it failed to satisfy the requirements of sec. 51(1). It may be proper to add that the payment appears to have been one associated with the reorganisation of the taxpayer's business structure and therefore to have been an affair of capital.

6. We would uphold the Commissioner's decision on the objection.

Claim disallowed