Case B5

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 4 February 1970.

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J. L. Burke (Chairman), R. C. Smith and R. E. O'Neill (Members): The assessment before the Board is that for the year of income ended 25 August 1965 (the previous four years were ``loss'' years) and the calculation of carry-forward losses and of the taxable income for the said year brings into issue the correct ``timing'' for the deduction of land tax for which the taxpayer became liable as owner and also as lessee to its lessors in terms of leases to it, of the premises (A and B) on which it carried on its retail business.

2. On 31 October 1959 a public company (``the parent'') acquired the whole of the issued capital of the taxpayer which then owned the A premises. During November 1959 the parent also acquired the whole of the issued capital of B Pty. Ltd. which latter company then owned the B premises.

3. At all material times until 11 April 1962 the A premises were held by the taxpayer in fee simple. By contract of sale dated 9 April 1962, the taxpayer sold this property, the contract of sale providing, inter alia, that, on completion of the transfer, ``the purchaser'' should grant, and taxpayer's parent should take, a lease of the property sold. The property was transferred to the purchaser on 11 April 1962 and the purchaser granted a lease of the property to the parent from that date on terms set out in a Memorandum of Lease dated 11 April 1962. The taxpayer thereafter occupied the property as a sub-lessee of its parent on the same terms as those contained in the Memorandum of Lease dated 11 April 1962. The terms of the sub-lease were not reduced to writing.

4. The Memorandum of Lease provides inter alia that-

(a) [Clause 2(a)] The Lessee will during the term of the lease (which expires on 13 April 2022) pay to the Lessor a total yearly rent consisting of-

(i) a fixed minimum annual rent of £96,877.1.0 ($193,754.10);

(ii) an additional rent (called the ``percentage rent'') being the amount (if any) by which 2½% of the gross sales of the lessee (which term includes the lessee's successors and permitted assigns) in its business conducted in the demised premises in each lease year exceeds the minimum rent.

(b) [Clause 3(g)] ``The Lessee will pay all rates taxes and assessments whatsoever whether municipal Local Government Parliamentary or otherwise which are at any time during the said term charged upon the demised premises or upon the Lessor on account thereof including State and Federal land taxes PROVIDED THAT the amounts payable by the Lessee pursuant to this clause for or on account of land tax shall be the amounts by which each assessment of land tax payable by the Lessor from time to time in respect of land held by the Lessor during the term of this lease has been increased by reason of the ownership by the Lessor of the demised premises.''

5. In addition to paying the rental due under the Memorandum of Lease between its parent and the purchaser, the taxpayer duly reimbursed the purchaser for land tax charged to the purchaser. Under the lease arrangement between the parent and the taxpayer in respect of A premises, the taxpayer was charged with the land tax reimbursement in accordance with the basis specified in cl. 3(g) of the abovementioned Memorandum of Lease, the cheque for such payment usually being drawn by the parent and charged by journal entry in each year to the taxpayer.

6. Under the Land Tax Management Act 1956 (N.S.W.) as amended, land tax for the period commencing on 1 November in any year is levied on an owner of land in respect of all land owned by him on 31 October of that year and is charged on the land. The actual assessment issues to the land owner sometime after 31 October each year. In the instant case the reimbursement notices which the purchaser served upon the parent did not necessarily indicate that the purchaser had received the assessment for the amount set out therein but as the purchaser was on the maximum rate of tax the tax could be calculated with certainty subject to knowledge as to the U.C.V. of A premises. It was the purchaser's practice to notify the parent of any changes in the U.C.V. of the subject land and the figure itself was recorded in the reimbursement notices.

7. The notices of reimbursement relating to tax on the A land held by the purchaser at 31 October 1962, 31 October 1963 and 31 October 1964 were issued to the parent by the purchaser on 22 October 1963, 5 November 1964 and 16 December 1965 in

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amounts of £22,000, £20,900 and £20,900 respectively.

8. At all relevant times the B premises were owned by B Pty. Ltd. and were occupied by the taxpayer in terms of a lease granted by that company. This lease was not reduced to writing. The terms of this lease provided inter alia that the lessee should pay an annual rental of £30,000 and all rates and taxes charged on the property or upon the lessor on account thereof, including State land tax.

9. Land tax was reimbursed to B Pty. Ltd. in respect of the lease between it and the taxpayer, the reimbursement being based on the charge borne by B Pty. Ltd. under the combined assessment issued to the parent and its subsidiaries in respect of properties owned by that company and its subsidiaries; this charge was computed by an allocation of the total land tax payable based upon the ratio of the unimproved capital value of land owned by B Pty. Ltd. and leased to the taxpayer to the total U.C.V. of land owned by the parent group.

10. Up to and including the year ended 30 June 1960 the taxpayer adopted an accounting period ending on 31 July each year. An accounting period ending on 23 August 1961 was adopted in lieu of the year ended 30 June 1961, and in subsequent years an accounting period ending on the last Wednesday in August of each year has been adopted. At all relevant times the taxpayer prepared its accounts on an ``earnings'' or ``accrual'' basis of accounting.

11. Up to and including the income year ended 25 August 1965 the taxpayer claimed deductions on account of land tax payable, in respect of land owned by it and land occupied by it as lessee, to the extent of the amounts charged in the accounts of the taxpayer for the respective years of income. The amounts charged in the accounts were on the basis of monthly accruals by reference to the amount which the taxpayer calculated its liability to be whether as owner or lessee for or in respect of land tax as at each 31 October.

12. The Commissioner, however, did not accept the taxpayer's claims as made. He allowed deductions on the basis that an outgoing was ``incurred'' for or in respect of land tax at the time when a notice of land tax assessment issued to the taxpayer or when it was served with notice of liability under the terms of its lease. His action was based on the view that, until the happening of either of those events, there was no debt due by the taxpayer, whether payable presently or in the future, and that there can be no outgoing ``incurred'' until a debt is contracted.

13. The taxpayer's returns for each of the four years 1961-1964 disclosed a sec. 80 loss. Its 1965 return, however, disclosed a taxable income subject to deduction of the sec. 80 losses for the four preceding years. The 1965 taxable income as returned was some £18,000 less than the total of such losses. The adjustments made by the Commissioner in respect of land tax as claimed each year by the taxpayer reduced the total of the sec. 80 losses as returned, with the result that after recoupment thereof there was left a taxable income for 1965 in excess of £14,000. Accordingly, the matter in issue is of material concern to the taxpayer.

14. The following table sets out for the years mentioned details of (a) tax charged in the accounts, (b) tax actually assessed to the taxpayer or its lessors as at 31 October falling within the years of income, and (c) tax ``paid'' according to the Commissioner's calculations-

 Year
ended
August           (a)              (b)           (c)
1961 ....           L29,879        L27,755        L28,477
1962 ....            28,392         28,515         30,662
1963 ....            35,487         37,167         15,167
1964 ....            36,309         35,316         22,000
1965 ....            34,844         35,307         35,316
          

The company agrees that if its claim fails the amount allowable for the year ended 23 August 1961 should be £27,755 in lieu of £28,477 and for the year ended 29 August 1962 should be £28,515 in lieu of £30,622, all figures being on a ``tax paid'' basis.

15. Alternative to the claim that it should be allowed to deduct ``land tax'' on a monthly accrual basis the taxpayer company, before the Board, argued that there was a loss or outgoing incurred as at each 1 November in respect of land tax for which it itself became liable as owner or which fell upon it as lessee in terms of the lease to it of land used in its business. We read the taxpayer's objection as being wide enough to cover the alternative and we are of the opinion that this alternative claim should be upheld.

16. The view that an outgoing is not ``incurred'' unless, there being no actual payment, a debt is contracted finds some support

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in cases such as
Jolly v. F.C. of T. (1934) 50 C.L.R. 131 at p. 137;
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290; and
Emu Bay Railway Co. Ltd. v. F.C. of T. (1944) 71 C.L.R. 596. On the other hand there are strong indications in the cases that there may be an ``outgoing incurred'' although, there being no actual payment, no debt has been contracted:
New Zealand Flax Investments Pty. Ltd. v. F. C. of T. (1938) 61 C.L.R. 179 and
F. C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492. Thus in Flood's case at p. 506 the Court said that outgoings ``incurred'' are those ``to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement''-those to which the taxpayer ``has completely subjected himself''. But the Court added-

``It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible.''

17. Assuming in favour of the Commissioner that no outgoing is ``incurred'' until a debt is contracted, still we think that it is proper to say that the taxpayer's obligation as at each 1 November for land tax constituted a debt then due and owing by it in the sense appropriate to the operation of sec. 51(1). A debt is a sum certain which any person is legally liable to pay whether presently or in the future by reason of a present obligation.

18. That the taxpayer was at each 1 November under a present obligation to make a future payment for or in respect of land tax either as owner or under its covenant as lessee is, we think established by the decision in
Tooth & Co. Ltd. v. Newcastle Developments Ltd. (1966) 116 C.L.R. 167, the headnote of which reads-

``By virtue of the operation of the Land Tax Act 1956 (N.S.W.) and the Land Tax Management Act 1956-1963 (N.S.W.) land tax for the period commencing on 1 November of any year is levied on an owner of land in respect of all land owned by him on 31 October of that year and is a first charge on the land. The rates of tax for each one pound of the taxable value of a taxpayer's land increase with the taxable value of the land.

A lessee covenanted `to pay bear perform and discharge all rates taxes duties burdens assessments and outgoings of every description now charged or imposed or hereinafter to be charged or imposed upon or in respect of the demised premises or upon the lessor... in respect thereof'. The lessor owned other land in addition to the demised land.

Held: (1) That land tax imposed on the lessor in respect of the demised land fell within the covenant.

(2) That the lessee's liability under the covenant was to pay such part of the lessor's total liability as bore to that total liability the same ratio as the value of the demised land bore to the total value of the lessor's land.

(3) That the liability of an owner for land tax, and hence the liability of the lessee under the covenant, did not wait upon the issue of a notice of assessment. `Assessment' in the context of the Act means no more than the ascertainment of the extent of a previously existing liability.

(4) That in respect of the land tax year 1961-1962 the lessee, whose term expired on 31 December 1961 and who then went out of possession, was liable under the covenant to pay the whole of the land tax imposed in respect of the demised premises.''

19. Was the taxpayer at each 1 November under a present obligation to pay a sum certain? On the authority of the decision in
Commr. of Stamps (W.A.) v. West Australian Trustee, Executor & Agency Co. Ltd. (1925) 36 C.L.R. 98 (Mortimer Kelly's case), we think that question should be answered affirmatively. In that case it was held that Federal income tax in respect of income derived by a person during a period antecedent to his death imposed by an Act passed during his lifetime, although not assessed or otherwise ascertained during his lifetime, is after his death a ``debt due by the deceased person'' within sec. 88 of the Administration Act 1903 (W.A.). Knox C.J. said at pp. 104-105-

``A sum of money is none the less certain because the method by which it is to be ascertained is complicated or involves a decision by some specified person (see
Gordon v. Whitehouse (1856) 18 C.B. 753 at p. 753). It follows that the liability imposed

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by the Income Tax Act 1922 on a person who derived taxable income during the preceding year was, in my opinion, a liability to pay a `sum certain' in the sense that it was a sum capable of being ascertained by the application of a prescribed method. Whether that method was simple or complex or whether it involved considerations outside mere arithmetical calculations was, in my opinion, quite irrelevant.

Counsel for the appellant contended that no obligation to pay income tax was created before the assessment by the Commissioner. In my opinion this contention cannot be sustained. It is true that income tax is not payable until thirty days after assessment, but the liability or obligation to pay imposed by the Income Tax Act comes into existence on the passing of that Act. It is true also that `income tax' is defined in the Income Tax Assessment Act as meaning the income tax imposed by any Act as assessed under this Act. But this seems to me to mean no more than that the amount payable in discharge of the obligation created by the Income Tax Act is to be ascertained according to the method prescribed by the Income Tax Assessment Act. In effect, the assessment is no more than a demand for the payment of a definite sum which had not theretofore been precisely ascertained. There are certain cases in which the ascertainment of the amount of tax involves the exercise of a discretion by the Commissioner, but in the great majority of cases the amount of tax payable could be accurately determined by any skilled person conversant with the relevant facts.''

20. In Flood's case the Court, after examining the relevant award, concluded that the employer had not, in the year of income, come under any obligation for holiday pay in respect of any particular individual employee, and that to set aside an amount against the likely future obligation to make payment of wages to an employee whilst on holidays was a mere provision based upon an estimate for a future outlay. At pp. 507-508 the Court said-

``There was not an accrued obligation, whether absolute or defeasible. There was at best an inchoate liability in process of accrual but subject to a variety of contingencies. It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30 June 1947, become predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means that it is imposed in the form of a liability associated with the operations of the taxpayer for the ensuring year. In short the deduction claimed of £578.10.2 does not represent an expenditure associated with the production of income before 30 June 1947 for which a liability had been completely incurred before that date.

On this ground the taxpayer fails.''

21. In the present case the taxpayer came under a present obligation for land tax on 1 November in each year of income. What it seeks to deduct in each year under its alternative claim is therefore not to be seen merely as an amount set aside against a likely future obligation to make payment of land tax. Moreover the obligation is to discharge a liability associated not with the production of income of an ensuing year but associated with the production of the income of the year in which the obligation arose. The amount of its liability in respect of each year is quantifiable in the year of income; as Knox C.J. said in Mortimer Kelly's case, ``the amount of tax payable could be accurately determined by any skilled person conversant with the relevant facts''. That is not to deny that if a lessor is unco-operative, a lessee such as the taxpayer might have difficulty in making himself conversant with the relevant facts. But in our opinion a sum set aside in the year of income to meet a liability for land tax, whether as owner or as lessee, has none of the characteristics of a provision against a likely future obligation such as to bring it within the ratio of Flood's case.

22. For the given reasons we uphold the taxpayer's claim that it incurred outgoings as at each 1 November for or in respect of land tax attributable to both the A and B premises.

Claim allowed