AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED v FC of T

Judges:
Sweeney J

Court:
Federal Court

Judgment date: Judgment handed down 16 April 1993

Sweeney J

The applicant requested the respondent (``the Commissioner'') to refer to the court his decision disallowing its Notice of Objection dated 28 May 1987 to his assessment of income tax in respect of the year ended 30 September 1986.

The applicant claimed that:

1. it was entitled to a deduction under s. 51 of the Income Tax Assessment Act 1936 (``the Act'') in respect of a provision established by it in its accounts in relation to Workcare claims for the year of income ending 30 September 1986;
2. it was entitled to a deduction for amounts said to be losses on the disposal of luxury motor vehicles leased by it to its customers in the same year of income.

I shall deal first with the Workcare issue.

The applicant's submissions read as follows:

``LEGISLATIVE BACKGROUND - ACCIDENT COMPENSATION ACT 1985

1. A new system of workers' compensation, known as `Workcare', was introduced in Victoria with effect from 1 September 1985. The Workcare scheme was governed by the provisions of the Accident Compensation Act 1985 (Vic). The Workcare scheme had the consequence that, as from 1 September 1985, the Accident Compensation Commission became the sole workers' compensation insurer in Victoria. Employers became liable to pay levies to the Commission pursuant to Part VII of the Accident Compensation Act.

2. The Workers scheme provided, however, for large employers, satisfying particular

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financial criteria, to be registered as `self- insurers' pursuant to the Accident Compensation Act. Such registration had two main consequences. First, the employer became exempt from payment of levies pursuant to Part VII. Secondly, the employer became liable directly to compensate employees suffering `injuries' within the meaning of s. 5(1) of the Act.

EVIDENCE

The Applicant submits that, on the evidence, the following findings of fact should be made:-

3. The Applicant became, with effect from 1 September 1986, a `self-insurer' for the purposes of the Accident Compensation Act (Exhibit DCC2). Accordingly the Applicant was not obliged under that Act to pay levies pursuant to Part VII. Furthermore it became liable to meet its own liabilities to injured employees arising pursuant to that Act.

4. As at the end of the 1986 year of income (the Applicant's tax year ending on 30 September 1986), there were two categories of liabilities incurred by the Applicant in respect of Workcare claims or potential Workcare claims not then concluded (affidavit of Mr Coull, 17.2.92, para. 8):-

(a) claims reported but not paid - that is, claims for compensation which had been notified by workers to the Applicant, but which were unresolved and unpaid as at the end of the year of income;

(b) claims incurred but not reported - that is, claims which had not been notified by injured workers to the Applicant as at the end of the year of income.

5. Necessarily, liabilities in respect of both of those categories of claim had to be estimated. It was impossible, as at the end of the 1986 year of income, to ascertain the precise amount of the liabilities.

6. Estimates were made in the manner described below. In its income tax return for the year ended 30 June 1986, the Applicant claimed a deduction in the total amount of $779,594 in respect of such estimates, that amount being made up of:-
    Claims reported but not paid     $623,675
    Claims incurred but not
      reported                       $155,919
                                     --------
    TOTAL                            $779,594
                                     ========
              
Exhibit A, p. 22 and p. 25.

7. The Commissioner subsequently issued an assessment dated 30 March 1987 (Exhibit A, p. 33). It was accompanied by an adjustment sheet (Exhibit A, p. 34) which indicated that there had been disallowed `claims under Workcare' in the amount of $779,594. The Applicant lodged a Notice of Objection against the assessment, which included an objection against the disallowance of the Workcare claim (Exhibit A).

8. The method adopted by the Applicant for the purpose of making estimates of liabilities in respect of both claims reported but not paid and claims incurred but not reported, is described in the affidavit of Mr Coull (17.2.92 para. 9, and paras. 13-20). The procedure was as follows:-

(a) Mr Jubb, the Accident Compensation officer of the Applicant (being a person with 20 years' previous experience in workers' compensation insurance) received each workers' compensation claim on behalf of the Applicant (17.2.92, para. 7);

(b) Mr Jubb, upon receiving a claim, made an estimate in respect of the liability of the Applicant to that claimant (Transcript p. 44.2);

(c) Mr Coull and Mr Jubb considered the larger claims for the purpose of estimating the total liability of the Applicant for that year for the purpose of including an amount in the Applicant's accounts (17.2.92, paras. 13 and 15, Transcript p. 44.3-44.5);

(d) the Administrative Guidelines provided to the Applicant by the Department of Management and Budget required that the `employer is required to have the workers' compensation liability assessed at intervals of not more than 12 months by an approved actuary' (Exhibit DCC6 at p. 10);

(e) Mr Coull and Mr Jubb met with the actuaries for the Applicant, Towers Perin Forster & Crosby (`Towers Perin') for the purpose of complying with this

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requirement and for the purpose of obtaining external advice as to the appropriate estimate for its accounts. Mr Coull provided Towers Perin with a copy of a claims listing for the period 1 September 1985 to 31 August 1986, together with claims data supplied by Royal Insurance Limited, the Applicant's prior workers' compensation insurer, for the period September 1983 to September 1985 (17.2.92, para. 13-15);

(f) Towers Perin, on the basis of the material provided, verbally advised Mr Coull in late September 1986 that $751,000 would be a reasonable estimate. A detailed letter of confirmation to that effect followed on 6 March 1987 (17.2.92, para. 14, and Exhibit DCC7). That estimate related to the period 1.9.85 to 31.8.86.

(g) Mr Coull subsequently made a further estimate for the purpose of the preparation of the accounts for the period ending 30.9.86. Mr Coull did so in the following manner (17.2.92, para. 15);-

(i) firstly, by running a claims listing as at 30 September 1986 (Exhibit DCC8), and considering the total `current estimate' amount set down as an estimate of claims reported but not paid;

(ii) secondly, by adding to that amount an amount of 25% thereof as an estimate for claims incurred but not reported. The 25% figure was suggested to Mr Coull by Mr Wilson, an account executive of Reed Stenhouse, during a telephone conversation in September 1986. Mr Wilson's evidence was to the effect that the workers' compensation insurance industry adopted a figure of 25% of claims reported but not paid as an appropriate indicator of claims incurred but not reported, and that this figure was consistent across different industries despite the fact that the rate of claims might vary from one industry to another (Transcript p. 49.2).

Mr Coull arrived at a total estimate of $779,594, representing $623,675 in respect of claims reported but not paid and $155,919 in respect of claims incurred but not reported. The method utilised by Mr Coull was the same as the method found to be acceptable in
RACV Insurance Pty Ltd v. Federal Commissioner of Taxation [74 ATC 4169, at 4174] [1975] VR 1, at 5;

(h) Mr Coull's estimate was the figure included in the Applicant's accounts for the year ended 30.9.86 (17.2.92 para. 16, and the affidavit of Mr Burroughs 12.10.92).

9. With respect to the circumstances in which the Applicant sought to make estimates of its liabilities in respect of claims reported but not paid, the situation can be summarised as one in which:

(a) the number of claims was known;

(b) the nature of the injuries suffered in respect of each claim was known;

(c) the range of benefits payable pursuant to the Accident Compensation Act (s. 92 to s. 100) was ascertainable, having regard to the known salaries of the claimants.

10. Having regard to those known factors, the amount which would ultimately have to be paid in respect of each claim, and in respect of the totality of known claims, was capable of reasonable estimation.

11. Subsequent experience demonstrated that the estimates made by the Applicant as at the end of the 1986 year of income in respect of liabilities for both claims reported but not paid, and claims incurred but not reported, were less than the liabilities which actually had to be discharged in later years (affidavit of Mr Coull 17.2.92 para. 17, 19.6.92 para. 8).
Total amount paid        Total provision in
as at 10 December        1986 Accounts in
1991 for claims          claims 'reported
'reported but not        but not paid':
paid': $2,089,722        $623,675

Total amount paid        Total provision in
as at 10 December        1986 Accounts for
1991 for claims          claims 'incurred
'incurred but not        but not reported':
reported: $230,066       $155,919
              
12. The fact that the estimates made were significantly less than the amounts ultimately paid out does not detract from the

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conclusion that the liabilities were capable of reasonable estimation. If any finding of fact is open on the basis of the discrepancy, it is merely that the Applicant's officers in fact underestimated the liabilities - i.e. that they failed to make sufficient estimates on the basis of the information available to them. Shortcomings in the making of the estimates is a quite different matter from the question as to whether the liabilities were capable of reasonable estimation - and any such shortcomings do not support a finding that the liabilities were not capable of reasonable estimation.

13. The Applicant was obliged in preparing its accounts for the year of income to account for liabilities in respect of both claims reported but not paid, and claims incurred but not reported - s. 146(4) of the Accident Compensation Act 1985, and Exhibit DCC6, p. 6.

14. By its application for approval as a self- insurer, the Applicant undertook `to make provision in its accounts for current, non current liabilities in respect of its workers' compensation liabilities to employees' (Exhibit DCC1).

15. The guidelines issued by the Department of Management and Budget stated that `it will be the responsibility of a self-insurer to place an estimate of the expected claim payments and recoveries on each new claim and to review the estimates on a periodic basis. The frequency of the review is to be determined by the self-insurer but shall be carried out at no less than 6 monthly intervals' (Exhibit DCC6 at p. 2).

16. The Applicant disclosed as a liability in the Balance Sheet to its 1986 Accounts, under the heading `Other provisions', a provision in the amount of $3,451,000 for workers' compensation (Exhibit PMB2 at p. 34). That amount incorporated the estimated liabilities of $779,594 in respect of the two categories of claims under the Accident Compensation Act.

17. Proper accounting practice required that self-insurers, such as the Applicant, take into account in each year of income claims reported but not paid and claims incurred but not reported on the basis that these claims represent `liabilities' that were required to be recognised in that year of income.

18. The evidence of Mr Burroughs was that:-

(a) liability for both claims reported but not paid and claims incurred but not reported was provided for in the 1986 accounts (Paragraph l4 of his affidavit);

(b) the existence of a worker's compensation claim or potential claim gave rise to a `liability' in accordance with accepted accounting practice (paragraphs 17 and 18);

(c) the Approved Accounting Standard AASB1023 now requires that liabilities in respect of insurance claims be accounted for in a manner consistent with s. 146(4) and (5) of the Accident Compensation Act (paragraphs 21 and 22);

(d) there is no difference between the way in which an insurance company should account for such claims, and the way in which a self-insurer such as the Applicant should account (paragraph 20).

19. The evidence of Mr Lamble was that:-

(a) amounts payable in the future in respect of claims reported but not paid, and claims incurred but not reported, constitute `liabilities' within the meaning of that concept as defined in Statement of Accounting Concepts SAC4 (paragraphs 7 and 8, affidavit 14.10.92);

(b) AASB1023 requires that insurance companies provide in their accounts for liabilities in respect of both claims reported but not paid, and claims incurred but not reported (paragraph 9, affidavit 14.10.92);

(c) while the provisions of AASB1023 do not, in terms, apply to self-insurers, it is accepted accounting practice that self- insurers must account for liabilities in respect of outstanding claims in the same way (paragraph 10, affidavit 14.10.92);

(d) while those accounting standards did not exist in 1986, recognised accounting practice at that time was to the same effect (paragraph 14, affidavit 14.10.92).

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SUBMISSIONS ON THE LAW

THE ACCIDENT COMPENSATION ACT 1985 (VIC)

(Tab 1 in the Applicant's folder of Authorities)

1. Section 143 of the Accident Compensation Act provides as follows:-

`Where a worker or a worker's dependants are entitled to compensation under this Act and the worker's employer was, at the time of the injury-

(a) a body corporate that was at that time a self-insurer; or

(b) a body corporate that was at that time a subsidiary of a self-insurer-

the first-mentioned body corporate is, subject to section 151, liable to pay the compensation.'

[Emphasis added]

2. The effect of that section was to impose upon the Applicant the liability to pay compensation to which injured employees became entitled pursuant to the provisions of the Act.

3. Section 82(1) and (2) of the Accident Compensation Act provide as follows:-

`(1) If there is caused to a worker an injury arising out of or in the course of any employment the worker shall be entitled to compensation in accordance with this Act.

(2) If there is caused to a worker an injury arising out of or in the course of any employment which results in or materially contributes to the death of the worker the worker's dependants shall be entitled to compensation in accordance with this Act.'

The expression `injury' is defined in s. 5(1) of the Act.

4. The effect of those subsections was that entitlement to compensation arose at the time of occurrence of the relevant injury (or death, in the case of s. 82(2)).

5. Section 101(1) provides that a person would not be entitled to recover compensation unless notice of the injury was given to the employer. However, s. 101(2) deems the giving of the relevant notice in the event that a claim for compensation was made.

6. Section 102 deals with the form of notice to be given. Section 103 deals with the form of the claim to be made.

7. Section 109(4) provides for a self-insurer to either accept or dispute liability to a claim for weekly payments. Section 109(6) provides for a disputed claim to be considered by a Conciliation Division of the Accident Compensation Tribunal.

8. Sections 116 and 117 provide for the reference of disputed claims to be dealt with by, initially, a Conciliation Division of the Tribunal, and subsequently a Tribunal Division of the Tribunal. The powers and procedures of the Tribunal with respect to such matters are dealt with in s. 57 to s. 80 inclusive of the Act.

9. Sections 92 to 100 inclusive deal with the benefits provided for under the Act. Sections 93 and 94 provide for the provision of benefits in the form of weekly payments. Sections 92 and 98 provide for the payment of benefits in a lump sum. Section 99 provides for compensation in respect of medical expenses incurred by an injured worker.

10. The provisions of the Accident Compensation Act, and in particular s. 82 and s. 143, have the consequence that liability on the part of the Applicant to compensate injured employees arose at the time at which the employee suffered the injury. The existence of that liability was recognised by the Accident Compensation Act in s. 146(4) and (5), which provide as follows:-

`(4) For the purposes of an assessment under sub-section (5), the body corporate shall-

(a) make provision in its accounts for current, non-current and contingent liabilities in respect of injuries or deaths referred to in that sub-section; and

(b) permit an actuary approved by the Minister to inspect the books of the body corporate.

(5) In this section, a reference to the assessed liability of a body corporate is a reference to-

(a) the amount assessed, in accordance with the guidelines

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approved by the Minister, at intervals of not more than one year by an actuary approved by the Minister as the sum of the actuarial value of the current, non-current and contingent liabilities of the body corporate and, if the body corporate is a holding company, of each of its subsidiaries at the date of the assessment and the estimated value of such liabilities at the expiration of 12 months after that date, being liabilities in respect of injuries or deaths incurred or suffered by workers employed by it or its subsidiaries during the period during which the body corporate is a self- insurer and which entitled a worker or the dependent of a worker to compensation whether under this Act, at common law or otherwise and whether or not a claim for compensation has been made; or

(b) $3,000,000-

whichever is the greater.'

11. Those provisions made it clear that the Applicant was required to make provision in its accounts for both claims reported but not paid, and claims incurred but not reported. They confirm that the consequence of s. 82 and s. 143 is to crystallise liability at the time of occurrence of an injury.

12. The evidence of the two accountants (Mr Burroughs and Mr Lamble) was to the effect that accounting practice and accounting standards are to the same effect as s. 146(4) and (5) - see paras. 18 and 19 above.

THE MEANING OF `INCURRED' IN s. 51(1)

13. It is not in dispute that liabilities of the Applicant in respect of claims made against it under the Accident Compensation Act 1985 are deductible for income tax purposes pursuant to s. 51(1) of the Income Tax Assessment Act 1936. The matter in dispute is a timing issue - namely, when those amounts are deductible. The resolution of that issue turns upon the meaning of the word `incurred' in s. 51(1) of the Assessment Act.

14. In
New Zealand Flax Investments Limited v. Federal Commissioner of Taxation [(1938) 5 ATD 36] (1938) 61 CLR 179, Dixon J. commented upon the meaning of the word `incurred' in the following terms (at 206-7 [ATD pp 49-50]):-

`For the purpose in hand I think, that sec. 23(1)(a) must be the source in which the company must seek authority for the deductions. To come within that provision there must be a loss or outgoing actually incurred. ``Incurred'' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected.

In the present case I regard the obligation to pay interest to bond-holders who, within the four years from the date of issue, paid up the amount of the bonds, as a definite liability contingent only on the bondholders meeting their instalments, that is, in the case of bonds subscribed for in or before the respective accounting periods the subject of the assessment.'

15. That test was said by Barwick CJ in
Nilsen Development Laboratories Pty Limited v. Federal Commissioner of Taxation [81 ATC 4031] (1981) 144 CLR 616, as one which should be `carefully perused and applied' in that case (at p. 623 [ATC p. 4035]).

16. As liability to compensate injured employees arises at the time of injury, it is clear that such liabilities are more than `impending, threatened or expected'.

17. In
Federal Commissioner of Taxation v. James Flood Pty Limited [(1953) 10 ATD 240] (1953) 88 CLR 492, there were laid down tests which have been considered and applied in almost all subsequent cases concerned with the meaning of the word `incurred'. The Court stated as follows (at 506 [ATD 244]):-

`The word ``outgoing'' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word

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``incurred'', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement...

For under our law the facts must satisfy the expression ``losses and outgoings incurred''. These words perhaps are but little more precise than the word ``established'' or the expression used above ``definitively committed''. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. 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 indefeas- ible.'

[Emphasis added.]

18. The Court also indicated that a critical issue was determining the point at which legal liability arose (at 507-8 [ATD 245]):-

`It is one thing, however, to say that it is not necessary, for the purposes of s. 51(1), that an actual disbursement should have taken place. It is another thing to say that in the present case the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the ensuing accounting period by employees whose service had not as yet qualified them for annual leave. In respect of those employees there was no debitum in praesenti solvendum in futuro. 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.'

19. Applying those tests in the present case, having regard to the provisions of the Accident Compensation Act it could only be said that, from the time at which the injury to the employee occurred:-

(a) the Applicant was, by virtue of the terms of the Accident Compensation Act, definitively committed to compensate the employee; and

(b) there existed a present liability which would have to be discharged at a future time - i.e. situation could be accurately described as debitum in praesenti, solvendum in futuro.

Following the occurrence of an injury to an employee there was no further act or matter, yet to occur, the occurrence of which was necessary to crystallise the liability of the Applicant.

20. Nilsen Development Laboratories Pty Limited v. Federal Commissioner of Taxation ([81 ATC 4031] (1981) 144 CLR 616) was concerned with the time at which liability to long service leave and annual leave was `incurred' by an employer. As in James Flood, it was held that no liability was incurred until the time at which the employee took the leave (or ceased employment). Barwick CJ stated as follows (at pp. 623-4 [ATC p. 4035]):-

`In my opinion, the language of Dixon J. in New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation ((1938) 61 CLR 179, at p. 207) needs to be carefully perused and applied. Granted that exhaustive definition of what may be denoted by the word ``incurred'' in s. 51(1) may not be possible, there can be no warrant for treating a liability which has not ``come home'' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham's language in
Emu Bay Railway Co Ltd v. Federal Commissioner of Taxation ((1944) 71 CLR 596, at p. 606) clearly enough indicates that to satisfy the word ``incurred'' in s. 51(1) the liability must be ``presently incurred and due though not yet discharged''. The ``liability'' of which Sir John speaks is of necessity a pecuniary liability and the word ``presently'' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation (supra) which presently needs emphasis is that the word ``incurred'' in s. 51(1) ``does not include

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a loss or expenditure which is no more than pending, threatened or expected'': and I would for myself add ``no matter how certain it is in the year of income, that that loss or expenditure will occur in the future''.'

Gibbs J. stated as follows (at pp. 627-8 [ATC p. 4037]):-

`The principle to be applied in deciding whether a loss or outgoing as ``incurred'' is clear enough. It is not now necessary to consider whether those suggestions should be accepted as correct. But what is clearly necessary is that there should be a presently existing liability. In Federal Commissioner of Taxation v. James Flood Pty Ltd, this was expressed by saying that the provisions of s. 51(1) cover ``outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement'', and that those provisions ``do not admit of the deduction of charges unless... the taxpayer has completely subjected himself to them''. In other words, s. 51(1) does not cover ``a loss or expenditure which is no more than impending, threatened or expected'': New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation ((1938) 61 CLR at p. 195).

If these principles are applied to the present case, the question is whether the taxpayer was under a present liability to make a payment to its employees in respect of leave. The answer is that it was not. The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all.'

Mason J. agreed with the reasons given by Barwick CJ (at p. 630). However, his Honour additionally made comments indicating agreement with the results in three cases considered below (RACV Insurance Pty Limited v. Federal Commissioner of Taxation [74 ATC 4169] [1975] VR 1,
Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation (1977) 77 ATC 4151, and
Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation (1977) 77 ATC 4186). His Honour stated (at p. 632 [ATC pp. 4039-4040]):-

`I agree with the Chief Justice's comment on the observations of Dixon J. in New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation ((1938) 61 CLR 179, at 207). And I do not understand RACV Insurance Pty Ltd v. Federal Commissioner of Taxation ([1975] VR 1) to have decided otherwise. There, Menhennitt J. held that the taxpayer, an insurance company, was entitled to deduct as a loss or outgoing under s. 51 an amount reasonably estimated to be the total amount which it would have to pay in respect of its liability to indemnify insured drivers against claims by third parties incurred, but not reported, during the year of income. The estimate was made in respect of accidents occurring in that year which gave rise to liability under policies then in existence. Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation ((1977) 77 ATC 4186) falls into the same category. See also Commonwealth Aluminium Corporation Ltd. v. Federal Commissioner of Taxation ((1977) 77 ATC 4151) where the taxpayer completely subjected itself to liability to pay royalties.'

21. The emphasis in those judgments is on identification of a presently existing liability. That did not exist in the Nilsen case because `the event on which the entitlement of the employees to payment depended had not occurred' (at p. 628 [ATC p. 4037]). It is different in the present case. The only event upon which entitlement to receive compensation depended was the occurrence

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of an injury, and that had occurred. Thus, liability on the part of the Applicant was complete, although not yet discharged.

ESTIMATING LIABILITIES

22. It has been recognised by the Courts that the mere fact that the quantum of a liability cannot be precisely ascertained does not prevent the taxpayer from claiming a deduction - i.e. it does not have the consequence that the liability is not `incurred'. That was recognised by Dixon J. in the
Texas Company (Australasia) Limited v. Federal Commissioner of Taxation [(1940) 5 ATD 298 at 354-355] (1940) 63 CLR 382, at 465-6, where his Honour stated as follows:-

`For where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense, and where the continuous course of a business is divided for accounting purposes into closed periods it is a reduction of the net profit, which otherwise would be calculated for the period.'

23. In Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation (1977) 77 ATC 4151, the Commissioner argued that liability to pay mining royalties had not been `incurred' by the taxpayer in circumstances where the validity of the legislation imposing the royalties was challenged, and as at the end of the year of income the precise amount of the royalty could not be calculated. Newton J. nevertheless held that liability had been `incurred'. His Honour stated as follows (at p. 4160-61):-

`For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss or outgoing which has been ``incurred'' within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p. 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation: see Texas Company (Australasia) Ltd v. F.C. of T. (1940) 63 CLR 382 at pp. 465-6 per Dixon J.; and R.A.C.V. Insurance Pty Ltd v. F.C. of T. 74 ATC 4169 at pp. 4176-77; (1975) VR 1 at pp. 8-9... In this context I think that the quantum of a liability is ``capable of reasonable estimation'', if it is capable of approximate calculation based on probabilities: see para. 2 of the definitions of the noun ``estimate'' in the Shorter Oxford Dictionary 3rd ed. (1950); see too
J.J. Savage & Sons Pty Ltd v. Blakeney (1970) 119 C.L.R. 435 at p. 442. The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible: see Flood's case at pp. 506-7.'

24. Two parts of the passage quoted from the judgment of Newton J. require emphasis:-

(a) the liability the quantum of which cannot be precisely ascertained will be deductible `provided that it is capable of reasonable estimation '; and

(b) such liability is capable of reasonable estimation if it is `capable of approximate calculation based on probabilities '.

25. It is submitted that those requirements were satisfied in the present case. Those statements, and the manner of application of the tests as demonstrated in RACV Insurance v. Federal Commissioner of Taxation (supra), and Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation (supra), show that it is erroneous to demand a high level of exactitude from a taxpayer before it will be said that a liability is `capable of reasonable estimation'. Having regard, in the present case, to the matters known to the Applicant in respect of claims reported but not paid (p. 6, para. 9 above), it is clear that liabilities in that category were at least potentially capable of as accurate estimation as the liabilities for incurred but not reported

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claims in the RACV and Commercial Union cases.

26. It must also be appreciated that in the RACV case the deduction in respect of claims incurred but not reported was allowable as at the end of the year of income, although the relevant estimates were only made at later dates. At that time, details of the potential claims were necessarily unknown. The liabilities were less capable of estimation than the claims reported but not paid in the present case. However that matter did not prevent the allowance of a deduction.

INSURANCE CASES

27. The decision of Menhennitt J. in RACV Insurance Pty Limited v. Federal Commissioner of Taxation (supra) is of considerable significance to the present case. That case concerned a claim for a deduction by an insurance company in respect of claims incurred but not reported as at the end of the year of income, arising out of its compulsory third party motor vehicle insurance business.

28. The amount estimated by the taxpayer in that case with respect to its liability for claims incurred but not reported was, for the purposes of its annual accounts, estimated on a statistical basis (at p. 5.5). However, by the time the income tax return came to be prepared, information was available as to a number of claims subsequently made which had not been reported as at the end of the year of income. Accordingly, for the purpose of determining the estimated liability on claims incurred but not reported as at the end of the year of income for inclusion in its income tax return , the taxpayer adopted the following procedure:-

(a) it identified the claims subsequently made which were in the `incurred but not reported' category as at the end of the year of income;

(b) it made an estimate, on a case by case basis, of its probable liability in respect of such claims.

Thus the taxpayer came up with a total estimated liability of approximately $1.4 million.

29. The evidence of Mr Coull in the present case is to the effect that the Applicant used the same technique to estimate its liability as at the end of the 1986 year of income in respect of claims reported but not paid. The conclusion at which his Honour arrived in the RACV case was that the estimate was `quite inadequate' to cover the taxpayer's total liabilities (p. 6.5). However, that did not stand in the way of the taxpayer being allowed a deduction in respect of the estimated liability.

30. The Commissioner's primary submission in the RACV case was that no amount was a loss or outgoing incurred by the taxpayer in the year of income, `unless the liability of the insurance company to indemnify the insured has been quantified by either a settlement of the claim or a judgment or order' (at p. 6.5). The argument put on behalf of the Commissioner was thus inconsistent with the basis upon which the taxpayer was assessed (i.e. by allowing to the taxpayer in that case a deduction in respect of claims reported but not paid). The Commissioner's primary submission was ejected (at p. 8-9, and p. 15). His Honour stated as follows (at p. 8-9):-

`When there has to be considered the question whether an insurance company has incurred a loss or outgoing in a particular year that question comes to be considered in relation to the nature of the business being carried on. The essence of insurance business is that, in respect of each class of risk insured against, the insurance company aims to satisfy its liabilities to the policy holders who actually experience the risk primarily out of the total of the premiums paid by all the policy holders, most of whom normally do not experience the risk. In relation to liability insurance the insurance company is bound to indemnify its insured against his liability to a third person. Once events have occurred out of which a liability to indemnify an insured arises, it appears to me that within the meaning of s. 51(1) of the Income Tax Assessment Act a loss or outgoing has been incurred. Events have occurred which have subjected it to a liability to indemnify its insured against his liability to a third person and the extent of that liability is capable of reasonable estimate. Where there is no

ATC 4249
real question of the liability of the insured to the third party and the only question is one of estimating damages, the fact that the quantum of the loss or outgoing is a matter of estimate and that the amount may have to be adjusted in the light of later events does not stand in the way of it being a loss or outgoing (see New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation (1938) 61 C.L.R. 179, at p. 199; A.L.R. 1, and Texas Co. (Australasia) Ltd v. Federal Commissioner of Taxation, supra, at (C.L.R.) pp. 465-6) and in a case where the liability of the insured to the third party is in issue but the amount which is likely to be payable can be reasonably estimated, it is still I think true to say that within the meaning of s. 51(1) a loss or outgoing has been incurred by the insurance company. In
Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation(1951) 82 C.L.R. 364; [1951] A.L.R. 603, Fullagar, J., said at (C.L.R.) p. 369:-

``It is common ground that the account must, almost of necessity, proceed upon an `accrual' or `earnings' basis. It is the appropriate figure for book debts that is in question. This is in essence a matter of estimation, and (apart from express provision in the Act) it would be proper to make an allowance for bad and doubtful debts. In
Sun Insurance Office v. Clark [1912] A.C. 443, at p. 454; [1911-13] All E.R. Rep. 495, Lord Loreburn said: `There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case'.''

The passage I have referred to in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation, supra, also leads to the conclusion that where an adjustment of an estimate is necessary in the light of later events it is permissible to take the amount of the adjustment into account in the year when it is made.

The conclusions I have stated are, I think, reinforced by the consideration that under s. 51(1) a loss or outgoing is a deduction to the extent to which it is incurred in gaining or producing the assessable income. The liability to indemnify in respect of events occurring in the year of income is, it seems to me, properly to be regarded as incurred in gaining or producing the assessable income of that year because it is out of that year's premiums that the liability is to be met.'

31. Crucial to his Honour's conclusion was that events had occurred `which have subjected it to a liability to indemnify its insured' - i.e. a motor vehicle accident had occurred giving rise to a potential claim. In the present case the critical matter is the occurrence of an injury to an employee. That is the only event which may give rise to liability to compensate an employee. There is no later event which will occur, the occurrence of which is necessary to crystallise liability. Thus liability is complete at the time of occurrence of the injury.

32. The basis upon which his Honour distinguished the decision in Flood's case is explained at p. 12.3. Unlike Flood, his Honour noted that `once the events have occurred which give rise to a liability to indemnify it seems to me that, within the meaning of the passage I have cited, a loss or outgoing has been encountered, run into or fallen upon' (at p. 12.5). The result in Nilsen Development Laboratories is, of course, distinguishable on the same basis, and, as has already been noted, Mason J. in Nilsen ([81 ATC 4031 at 4039] 144 CLR 616 at 632) accepted the correctness of the result in RACV.

33. In RACV, accounting issues were regarded as relevant but not critical. His Honour thought it proper `to have regard to the long established practice of insurance companies of including among losses in each year's accounts the estimates of liabilities' (at p. 13.9). The accounting practice `reinforces the conclusion' that the amounts of the estimates were losses and outgoings incurred. His Honour discussed (at p. 14.7) the relevance of the requirements

ATC 4250
under the Insurance Act 1973 with respect to the disclosure of liabilities in the taxpayer's accounts.

34. The Commissioner put forward an alternative argument to justify the disallowance of a deduction solely in respect of the claims incurred but not reported as at the end of the year of income. That argument was dismissed in the following terms (at p. 16):-

`The Commissioner advanced an alternative submission in relation to the amount directly involved in the appeal, namely the sum of $1,420,424 claimed as unreported claims or as claims incurred but not reported. The submission was that even if the Commissioner's main submission were not accepted no amount should be allowed until the taxpayer has had notice of a claim and that accordingly as none of the accidents in respect of which these amounts were claimed had been reported to the taxpayer in the financial year in question nothing should be allowed as a deduction in respect of this item.

I have concluded that in respect of compulsory third-party insurance claims a loss or outgoing is incurred by the authorised insurer when the events occur which impose on the authorised insurer a liability to indemnify the driver of the vehicle in respect of a claim by a third person for personal injury. Having regard to the fact that there is an unanswerable liability to indemnify the driver of the vehicle once the personal injury occurs, it seems to me that a loss or outgoing is incurred within the meaning of s. 51(1) of the Act once the events giving rise to a liability occur and that the incurring of the loss or outgoing is not dependent on notice of the injury or of the accident or upon a claim being made by the driver for indemnity.'

35. His Honour concluded by approving the basis upon which the taxpayer had made estimates of its liability (at p. 17):-

`In the result it appears to me that the taxpayer is entitled to claim a deduction in respect of the claims incurred in the year of income but not reported. The question remains as to the appropriate amount to be included. In its annual accounts the taxpayer included a statistical estimate of $1,320,000 upon the basis I have referred to. Mr Hawkins the actuary said that in his opinion this was a reasonable estimate in the circumstances of the taxpayer at that time. By the time it lodged its return the taxpayer had made estimates case by case of the claims by then reported and arising out of events happening in the year ended 28 February 1971 and this is the amount it claimed in its return, namely, $1,420,424. I am satisfied on the evidence that this amount represented the total of reasonable estimates of the taxpayer's liability in respect of claims of which it in fact had notice by that date. It seems to me in principle that events after the close of a financial year can be relied upon to support a case by case estimate in substitution for an earlier statistical estimate made at the time of its published accounts on the basis that the later estimate is more accurate than the earlier one. As to the adequacy and reasonableness of the estimate of $1,420,424, the evidence is that the amount claimed is more than justified.'

36. The decision in RACV case was not challenged by the Commissioner in Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation [77 ATC 4186, at 4188] (1977) 14 ALR 651, at 653.5. Rather, the Commissioner sought to distinguish it on three bases. The first basis was that many of the insurance policies issued by members of the Commercial Union Pool contained conditions requiring the giving of notice of the occurrence of an event insured against to be given to the insurer within a specified time (p. 659.8 [ATC p. 4192]). That does not arise in the present case, having regard to the deeming effect of s. 101(2) of the Accident Compensation Act.

37. The second basis relied upon by the Commissioner for distinguishing the result in RACV turned upon the method adopted to adjust claims from year to year so as to prevent the doubling up of deductions (p. 663.2 [ATC pp. 4194-4195]). That issue does not arise in the present case because, as in RACV, the year of income is the first year

ATC 4251
in which liabilities arose which were claimed as deductions (p. 665.9 [ATC p. 4196]).

38. The third basis upon which the decision in RACV was sought to be distinguished concerned claims which arose in a prior year of income (p. 666.2 [ATC p. 4196]).

39. The method of estimation utilised in Commercial Union was explained at p. 657-8 [ATC p. 4191]. It was noted that the method utilised resulted in a substantial underestimate of liabilities (p. 657.4 [ATC p. 4191]). However, that matter did not stand in the way of allowability of a deduction.

40. The insurance cases demonstrate that liabilities of the type in issue here have, in the past, been found by the Courts to be capable of reasonable estimation . Consistent with the decisions in RACV Insurance and Commercial Union, the appropriate conclusion in the present case is that the liabilities of the Applicant with respect to claims under the Accident Compensation Act were capable of reasonable estimation.''

The Respondent's Submissions on the Workcare Issue read as follows:

``1. The Respondent accepts much that is found in the Applicant's submissions on WorkCare. However the Respondent

(a) contest the assertion in para. 4 (p. 2) that the two categories of liabilities referred to were `incurred by the Applicant';

(b) contests the assertions in para. 10 (p. 6) and para. 12 (p. 7) to the effect that the amounts which might be paid were capable of reasonable estimation;

(c) contends that the summary of evidence in paras. 18 and 19 (pp. 8-9) is incomplete and fails to note that accountants record many matters as liabilities which are incapable of being an allowable tax deduction;

(d) contests the assertions in para. 4 (p. 11), para. 10 (p. 11), para. 16 (p. 14), para. 19 (p. 15), para. 21 (p. 18) and para. 31 (p. 23) to the effect that the liabilities which are the subject of the provision (and claim for tax deduction) were complete at the point of injury;

(e) contests the assertions in para. 25 (pp. 19-20) and para. 29 (p. 21) that the future amounts payable were capable of estimation, and the assertion that the claims by ANZ were `of the type' (para. 40 - p. 25) previously found by the Courts, (e.g. in the RACV Insurance Ltd case and the Commercial Union case) to be capable of reasonable estimation.

A. The claim for deduction

2. The Australia and New Zealand Banking Group Limited (`the ANZ') claims that in its year of income ended 30 September 1986 it is entitled to a deduction under section 51 of the Income Tax Assessment Act 1936 (`the ITAA') for the amount it has provided in accordance with its obligation as a self- insurer under the Accident Compensation Act (Vic) 1985 (`the ACA'). The claim can be followed through the various schedules attached to the ANZ's income tax return for the 1986 year of income. In the detailed profit and loss account marked as schedule 2.1 there is shown under the heading `Charges' items of expenditure described as `Branches, State Administrations and GHQ Administration' an amount of $1,043,302,216. A more detailed breakdown of that amount is found in the document headed `Analysis of charges account - Australia' marked as schedule 2.2 showing a claim of a deduction for `Workers Compensation' (including provision $231,872) of $1,372,657. That amount, in turn, is further explained in schedule 4.1.

3. Schedule 4.1 describes the `movements in provisions and reserves' of the ANZ's operations in Australia. It shows a provision for Workers Compensation at the commencement of the 1986 year of income of $3,218,740. At the end of the 1986 year of income the provision has increased by $231,872 being the amount of increase specifically noted in schedule 2.2. Included in the total amount of $3,450,612 shown as the provision for Workers Compensation as at the close of the 1986 year of income was an amount of $779,594 described in schedule 9 as `claims under WorkCare' under the heading `Other deductible items'. This amount is further broken down and explained in schedule 9.8 headed `Claims under WorkCare'.

ATC 4252

4. It is clear from schedule 9.8 that the ANZ has claimed that it is entitled to a deduction in respect of amounts for which it has been required to make provision in its accounts for the 1986 year under section 146(4) of the ACA. Those amounts are made up of two elements:
    (a)  claims which have been
         reported but not yet paid             $623,675

    (b)  claims which it has
         incurred but which have
         not been reported                     $155,919
                                               --------
                                               $779,594
              
In fact it appears from an affidavit sworn 17 February 1992 by David Cordiner Coull that the amount shown as `Reported but not paid' was in error by $17,356 having inadvertently been included twice. In paragraph 19 of his affidavit he explains how that came about and paragraph 20 of his affidavit shows the correct amount which should have been claimed upon the calculations made by the ANZ as being $757,898 calculated as follows:
    (a)  claims reported but not
         paid                                 $606,319

    (b)  claims incurred but not
         reported at 25% of the
         previous amount                      $151,579
                                              --------
                                              $757,898
              
5. The provision for claims reported but not paid was calculated by the process described by Mr Coull in his affidavit. It involved estimating the value of future claims against the ANZ which had been reported but not yet paid. The proportion of the deduction claimed for claims said to have been incurred but not yet reported was a simple addition of 25% of the estimated value of the claims reported but not paid. The figure of 25% was chosen as being the insurance industry average for Workers Compensation claims. The estimate was of `the amounts which [ANZ] thought [it] would probably have to pay in the future', including weekly payments, medical expenses and that kind of thing T. 44 11.24-36.

B. Deductibility under Section 51

6. It is common ground between the parties that the claim for deductibility depends upon the provisions of section 51(1) of the ITAA. That section provides:-

`All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.'

The essential issue between the parties in relation to the WorkCare claim depends upon whether the amounts claimed had been `incurred' during the 1986 year of income.

7. The Commissioner's submission is that ANZ has not shown that the amount of the deduction claimed was a liability incurred by it in the 1986 year for the purposes of section 51(1) because, on the evidence, that amount:-

(i) included, and may have entirely consisted of, amounts for future weekly payments and medical expenses which ANZ was not liable to pay until the passing of the week in respect of which the weekly payments in question fell due or the injured worker incurred the relevant medical expense;

(ii) was not capable of reasonable estimate.

8. An obligation may be incurred for tax purposes though it be payable in the future (as contended on behalf of ANZ in paragraphs 13-21). What is essential to deductibility however, is that the taxpayer be `definitively committed' or `completely subjected' to the obligation at the time when the deduction is claimed. The issue was considered in F.C. of T. v James Flood Pty Ltd [(1953) 10 ATD 240] (1953) 88 CLR 492 in the joint judgment of Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ. at p. 504-508 [ATD pp. 242-243], where their Honours said:-

`However serviceable generalized conceptions may be in relieving overburdened assessors and tax accountants of the need of examining particular situations, all a court can

ATC 4253
decide is that case before it. And as the nature and incidence of the liability in the case before us obviously depends on the provisions of the award it is that instrument we should consider and not the validity of some independent general proposition. Now in delaying with that instrument it is necessary at the outset to observe that under the award an employee may fail to become entitled to annual leave for a number of reasons. He may die, his employment may be terminated because of his own fault, there may be a strike, or he may be guilty of absenteeism and be unable to rely on grounds of exception or excuse. From the employer's point of view there is a further possibility; He may never become liable to give his employees two weeks' leave on full pay because he may sell his business. There is a special provision which places the obligation in such a case upon the purchaser of the business. No doubt in that case the impending obligation would result in a diminution of the price of the business but that is a different thing from discharging the obligation. It may be true that all these reasons which, so to speak, would intercept the accruing right of an employee to be paid by the taxpayer are all of a particular character, but it is difficult to say in the face of them that there is a definite obligation to make a payment, incurred in respect of each completed month on that month being completed. Further, it is to be noted that when the employment of a man is terminated without his fault before he has served twelve months the amount he receives in respect of each completed month of service is not necessarily one twelfth of the full two weeks' pay for annual leave. The two things are calculated at different periods and the rates of pay may not be the same.

A most important feature of the award is that the leave must be taken and that it must be taken at a time which ex hypothesi in this given case falls outside the year of income. The payment is made to the employee in respect of the period of leave and forms part of his ordinary wages. The award therefore clearly regards the payments as something made in respect of the two weeks when leave is actually taken...

When the employees are considered not individually but collectively it is easy to understand that the taxpayer should say that it was antecedently quite certain, apart from the remote contingency of a change of ownership of the undertaking, that an expenditure on annual leave would be made in the ensuing financial year, and that an almost fixed proportion would be calculated in respect of periods of service falling within the year of income. But to say this is not enough. It shows no more than that part of the regular expenditure incurred in carrying on the undertaking is the payment of wages to men taking their annual leave and that the amount may be computed in advance with approximate accuracy because annual leave depends on twelve months' service.

[...]

What losses and outgoings arising in the course of business are to be deducted is a matter which must be governed by section 51(1) of the Income Tax Assessment Act. Under its provisions all losses and outgoings may be deducted to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, provided, of course, they are not of a capital nature or otherwise excluded. The word ``outgoing'' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word ``incurred'', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement.

[...]

For under our law the facts must satisfy the expression ``losses and outgoings incurred''. These words perhaps are but little more precise than the word

ATC 4254
``established'' or the expression used above ``definitively committed''. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. 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. But it is certainly true that it is not a matter depending upon ``proper commercial and accountancy practice rather than jurisprudence''. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by section 51(1) but it cannot be substituted for the test.

To repeat what has been said before in relation to an analogous provision in the Act of 1922-1934: ``To come within that provision there must be a loss or outgoing actually incurred. `Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is not more than impending, threatened, or expected.'' New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation [(1938) 5 ATD 36, at pp. 49-50] (1938) 61 CLR 179, at p. 207.'

These principles have been repeated in subsequent cases including Nilsen Development Laboratories Pty Ltd v. F.C. of T. (1981) 144 C.L.R. 616 and Ogilvy and Mather Pty Ltd v. F.C. of T. 90 ATC 4836.

C. The ANZ's obligations under ACA

9. The ANZ was a self-insured under the ACA during the 1986 year of income. As a self-insurer, section 143 of the ACA imposed upon the ANZ the liability to pay the compensation where a worker or worker's dependents were entitled to compensation under the Act. That entitlement was governed principally by Part IV of the ACA which gave entitlements to workers or their dependents upon a injury having arisen out of or in the course of the employment. Section 82(1), for example, gave a worker a right to compensation `in accordance with this Act' where there is `caused to a worker an injury arising out of or in the course of any employment'. Sub- section 82(2) conferred the entitlements to compensation upon the worker's dependents where the injury `results in or materially contributes to the death of the worker'. In each case, however, the `entitlement to compensation;' is an entitlement `in accordance with [the] Act', and not otherwise.

10. The benefits which the ACA conferred upon workers or their dependents were those primarily found in Division 2 of Part IV. Section 92 provides for lump sums payable on death, to the dependents of a dead worker. Sections 93 and 94 provide for weekly payments where a worker is totally or partially incapacitated:-

`93. (1) If a worker's total incapacity for work results from or is materially contributed to by an injury which entitles the worker to compensation the compensation shall be in accordance with this section.

(2) Subject to sub-section (3), compensation shall be in the form of weekly payments payable to the worker during the period of total incapacity for work...

94. (1) If a worker's partial incapacity for work results from or is materially contributed to by an injury which entitles the worker to compensation the compensation shall be in accordance with this section.

(2) Subject to sub-section (3), compensation shall be in the form of weekly payments payable to the worker during the period of partial incapacity for work...'

Section 98 provides for lump sum payments under a table of maims. Section 99 provides for medical expenses:-

`99. (1) If there is caused to a worker an injury arising out of or in the course of

ATC 4255
any employment, the Commissioner or a self-insurer and the employer in respect of the employer's liability under section 125(1)(a)(iii) shall be liable to pay as compensation-

(a) the reasonable costs of the medical, hospital, nursing, rehabilitation and ambulance services received because of the injury; and

(b) the reasonable costs of burial or cremation where death results from the injury-

which shall be in addition to any other compensation payable under this Act.'

Section 100 provides for indexation of benefits, including weekly payments. Section 119 provides for the method of making weekly payments:-

`119. (4) A weekly payment shall be made to a worker before the expiry of seven days after the end of the week in respect of which it is payable.'

Late payment is an offence (section 119(5)) and gives rise to pecuniary penalties (section 121).

11. Thus an examination of the provisions of ACA shows that benefits are frequently for the payment of weekly amounts during the continuation of incapacity. Provision is also made for payment of medical expenses which have been incurred by a worker. The provisions show that, in the case of weekly payments, entitlement to payment does not arise before the week to which the entitlement relates is entered upon, and that there is no entitlement to payment until after the passing of that week. In the case of medical payments the entitlement only arises when the medical service or treatment has been provided.

D. No liability to pay WorkCare payments until further events occur

12. It is contended for the ANZ that:

`In the present case the critical matter is the occurrence of an injury to an employee. That is the only event which may give rise to liability to compensate an employee. There is no later event which will occur, the occurrence of which is necessary to crystallise liability. Thus liability is complete at the time of occurrence of the injury'

(para. 31), (p. 23); see also para. 4 (p. 11), para. 10 (p. 11), para. 16 (p. 14), para. 19 (p. 15), para. 21 (p. 18).

Thus it is at the heart of the ANZ's case that it is the injury which creates the liability and the liability is complete upon that event. The submission denies any consequence of the nature of the liabilities as being predominantly the payment of weekly payments during a period of incapacity and the payment of medical expenses once incurred by the injured worker in the future.

13. It is submitted for the Commissioner that the liabilities of the ANZ in respect of weekly payments and medical expenses were not relevantly incurred within the meaning of section 51(1) until the passing of the week in respect of which the weekly payment in question fell due or until the medical expenses in question were incurred by the worker. In the same way the taxpayer in James Flood Pty Ltd was not liable to pay leave pay until the period of leave had been entered into. This follows also from the decision in Nilsen Development Laboratories Pty Ltd v FC of T [81 ATC 4031] (1981) 144 CLR 616. That case concerned a claim by the taxpayer to deduct a provision in its accounts for the payments it would be required to make for annual leave and long service leave in the year in which the employee took such leave. Three classes of employees were involved:-

`In each of these appeals the appellant company (the taxpayer) had, in the year of income (the year ended 30 June 1974), a number of employees whose conditions of employment were regulated by the Metal Industry Award 1971 and the Metal Trades (Long Service Leave) Award 1964. Some of those employees, having completed fifteen years' service, were entitled to take long service leave under the latter award, and would be entitled to receive payment for the period of the leave when they took it. A second class of employees, having been continuously employed for over twelve months, was entitled to take annual leave under c. 25 of the former award, and each employee would be entitled, before going on leave, to be paid the wages he would have received in respect of the

ATC 4256
ordinary time he would have worked had he not been on leave during the relevant period. None of these employees in fact took long service leave or annual leave, or received any payment in respect of any such leave, during the year of income. The question for decision is whether the taxpayer was entitled to deduct from its assessable income the amount which it was calculated that the taxpayer would be required to pay to the employees entitled to leave when they took it, or so much of that amount as was attributable to the year of income. A similar question was raised in respect of a third class of employees who, having served for less than twelve months, had no present vested entitlement to annual leave, but for reasons that will appear the answer to this question is quite clear, and in referring to the facts of the case I need not separately mention those relevant to this class.'

per Gibbs J at 625-6 [ATC at 4036].

The court held that there was no liability to make payment until the employees either took the leave or ceased employment and, therefore, that the amounts provided in the company's accounts were not outgoings incurred by the company in the year of income there in question. Barwick CJ. (with whose judgment Aickin and Wilson JJ. agreed) said at p. 624 [ATC at p. 4035]:-

`In my opinion, it is abundantly clear from the terms of Metal Industry Awards and those of the Metal Trades (Long Service Leave) Award that the primary obligation placed on the employer by their terms is to give the employee who has served the requisite amount of time leave away from the employment whilst maintaining its continuity. Assuming the employer's business continues and the employee remains alive, a pecuniary liability to the employee will undoubtedly arise when, but not before, the employee enters upon a period of leave, be it annual or long service. When the employee has served a period of employment which qualifies him for leave, whether it be annual or long service, it may thus confidently be aid [said] that sooner or later he must be given leave and that when he enters upon his leave a liability will then, and for the first time, arise for the employer to make a payment of money to him.

It was suggested in argument that a liability to make such a payment was accruing during the time the employee was serving the period qualifying him for leave. But, in my opinion, it is not a precise or proper use of language to so describe the circumstance that an employee is becoming progressively qualified by length of service to be able to require that he be given leave of one sort or another. In my opinion, no liability is ``accruing'' in a proper sense of the word during the time that the employee is serving his qualifying period nor has it accrued when he has served that qualifying period.

All that can really be said is that it has become certain that, in due course when further events occur, that is to say, the time for the taking of leave is fixed and the period of leave is entered upon, a liability to pay money will arise. It is quite wrong, in my opinion, in this connection to treat any liability as either accruing or having accrued at any time prior to the time when the employee enters upon the leave, whether it be annual or long service.'

Much the same reasoning may be found in the judgment of Gibbs J. at p. 626 [ATC pp. 4034-4035] (with whom Stephen J. agreed) and by Mason J. (with whose judgment Aickin and Wilson JJ. agreed) at p. 631 [ATC p. 4039]. At 627-8 [ATC p. 4037] Gibbs J. said:-

`If these principles are applied to the present case, the question is whether the taxpayer was under a present liability to make a payment to its employees in respect of leave. The answer is that it was not. The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had

ATC 4257
not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing ``incurred'' within section 51(1).'

14. The relevant distinction was explained by Hill J in
Ogilvy & Mather Pty Ltd v. F.C. of T. 90 ATC 4836 at 4862 when his Honour said of the decision in Nilsen's case:-

`The ratio of the case would seem to be that the obligations of an employer to the employee in respect both of long service leave and annual holiday pay was to actually allow the relevant leave. Thus the employer was under a liability, being the ordinary liability to pay wages to an employee in respect of a period of employment, notwithstanding that the employee's entitlement to leave excused him from working or attending for work during that period... Thus no pecuniary liability arose until the period of leave was entered upon. It was then, and only then, that an accrued liability to pay money arose and an outgoing was deductible under the provisions of sec. 51(1) of the Act.'

15. From these passages it may be seen that a liability is not relevantly incurred where the obligation to pay has not arisen. Section 146(4) of the ACA does not impose any obligation to make payment but only to ensure that the accounts of a self-insurer provide for such future liability which may arise. Whether any liability exists in fact must be determined by the provisions imposing the liability to pay and not by a section doing no more than requiring that the accounts of a self-insurer show provision for such liabilities which may arise.

16. The fact that provision was made in ANZ's 1986 accounts for its future WorkCare liabilities does not mean that those liabilities were then incurred. So, in Nilsen at 624-5 [ATC 4035] Barwick CJ said:-

`All that then can really be said is that it has become certain that, in due course when further events occur, that is to say, the time for the taking of leave is fixed and the period of leave is entered upon, a liability to pay money will arise. It is quite wrong, in my opinion, in this connection to treat any liability as either accruing or having accrued at any time prior to the time when the employee enters upon the leave, whether it be annual or long service.

Of course, it may very well be that in the keeping of commercial accounts it would be proper to make provision against the annual gross profits of some sum related to the amount of the liability which must in due course arise because of the service by the employee during the year of accounting; and to do so before arriving at the profits of some sum related to the amount of the liability which must in due course arise because of the service by the employee during the year of accounting; and to do so before arriving at the profits or gains of the period during which the qualification of the employee is taking place. But the prudence and commercial propriety of such a course has little bearing on the question whether there is present in the year of income a loss or outgoing within the meaning of section 51(1).'

Similarly Gibbs J said at 626-7 and 628-30 [ATC 4036 and 4037-4039]:-

`It follows from what has been said, and was indeed common ground, that during the year of income the taxpayer not only did not pay, but was not liable to pay, any amount in respect of the long service leave or the annual leave which the employees were entitled to take but did not take during that year. However, the learned primary judge accepted the evidence of accountants called by the taxpayer, the effect of whose evidence, he said, was ``that prudent accounting would require that the income of a taxpayer... should be reduced in any year by a provision representing, as accurately as possible, the sum which the taxpayer, at the particular accounting period, could reasonably anticipate that he will be required to pay to employees by way of Long Service Leave pay''. It may be accepted that in ascertaining the profits

ATC 4258
of a year of income it would accord with accounting practice to have regard to that portion of the amount that the employer would be expected to pay to his employees in respect of long service leave and annual leave that could properly be related to the service of those employees during that year...

On behalf of the taxpayer there was advanced an alternative argument with which it is convenient to deal without pausing to consider whether the notices of objection entitled the taxpayer to rely upon it. This argument was that to enable the assessable income of the taxpayer to be ascertained it was necessary to take into account the sums that would be payable in respect of leave, since the application of recognized commercial principles and standard accounting methods would require those sums to be taken into account in order to arrive at the true income. It was further submitted that where the taxpayer had properly lodged a return of income on an earnings or accruals basis the income was the same as the balance of profits or gains and should be ascertained accordingly. Reliance was placed on such cases as Ballarat Brewing Co Ltd v Federal Commissioner of Taxation (1951) 82 CLR 364 and
International Nickel Australia Ltd v Federal Commissioner of Taxation (1977) 137 CLR 347, esp. at pp 352-354, 366-367. They were cases where the question was one of ascertaining income, and not of deciding what deductions were allowable from income once it was ascertained. The income was ascertained by means of a commercial profit and loss account. In relation to cases of that kind, I said, in International Nickel (1977) 137 CLR at p. 352:-

``Where the income of the taxpayer is derived from trade, there is not really a difference between the concept of income and that of profit which is significant for the purpose of answering questions arising under the Act, as Walsh J pointed out in
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421, at p. 433.''

My remarks, like those of Walsh J, were directed to the case where the question, properly regarded, was the ascertainment of income. They obviously do not mean that a trader who submits returns on an earnings basis can successfully claim that all deductions which might on commercial principles be considered in ascertaining profit can be made in determining the income, whether or not those deductions fall within section 51. Such an approach would leave little scope for the operation of the section, and would be contrary to the approach which the courts have consistently adopted in Australia. In J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR, at p. 434, Walsh J after making the remarks to which reference has been made above, went on to say:-

``... the differences between the Commonwealth Act and the English income tax law may more often be of importance in deciding questions as to the allowance of deductions (as for example in Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492), than in determining the manner in which, or the period at which, items of revenue should be taken into account in computing income (or profits) and in particular in determining the use which may properly be made of the principles and methods recognized and followed in making those computations in business and in commerce.''

In Ballarat Brewing Co Ltd v. Federal Commissioner of Taxation [(1951) 9 ATD 254] (1951) 82 CLR 364, it was because Fullagar J considered that the matter was one of arriving at the correct figure representing income, and that section 51 really had no bearing on the case that he held that the case depended on `the conceptions of business and the principles and practices of commercial accountancy' [(1951) 9 ATD 254, at p. 258] (1951) 82 CLR, at p. 368, ancy' [sic]. For once income has been ascertained, and the question is whether a deduction is allowable, `it is not a matter depending upon proper commercial

ATC 4259
principles or accountancy practice but upon the legal criterion set by section 51(1)':
Caltex Ltd v. Federal Commissioner of Taxation (1960) 103 CLR 650, at p. 655 [sic].

17. The conclusion that the mere fact that ANZ's accounts were required to contain and contained the relevant provision is insufficient to make that provision deductible is confirmed by the fact that ANZ makes provision in its accounts, as it is required to do, for other like `liabilities', which it accepts are not deductible - e.g. provision for long service leave: PMB2 ANZ 1986 Annual Report p. 34 `Other provisions', p. 40 Note 10 `Other provisions', p. 37 Expenses (d); Mr Burroughs T. 54 1. 29 - T. 55 1. 19.

18. The fact that a liability is likely or even certain has never been, and cannot be, a sufficient basis for finding that a liability has been incurred in the year of income. Were it otherwise, a taxpayer would be entitled to deduct future wages which were a virtual practical certainty. It may, for example, safely be assumed that a taxpayer such as the ANZ will continue to exist from one year of income to another, and it may be possible with reasonable certainty to estimate the wages payable in any succeeding year of income yet despite the practical certainty, and possibility of reasonable estimation of future wages, a tax deduction is not allowable for future wages for the simple reason that the liability is not incurred until the period in respect of which the wages are paid has been entered upon. Until that period has been entered upon it cannot be said that the liability has been incurred because the obligation may never arise if, for example, the employee dies or by reason of some other fact or event the obligation to pay never arises. This must necessarily be so also in the case of the ANZ's future obligations to pay weekly amounts under the ACA and medical expenses. Obviously an injured worker may die, for reasons quite unconnected with his injury, and if he or she does, no further liability to pay weekly payments, or to pay medical expenses, can arise.

19. That the case relied on by ANZ are quite different is demonstrated by para. 31 p. 23 of ANZ's submissions:-

`Crucial to his Honour's conclusion was that events had occurred ``which have subjected it to a liability to indemnify its insured'' - i.e. a motor vehicle accident had occurred giving rise to a potential claim. In the present case the critical matter is the occurrence of an injury to an employee. That is the only event which may give rise to liability to compensate an employee. There is no later event which will occur, the occurrence of which is necessary to crystallise liability. Thus liability is complete at the time of occurrence of the injury.'

It is submitted that the liability in question here is in fact quite different from those in the RACV case. There was a liability to indemnify the persons insured against their liability for damage which had already occurred, on the happening of a motor car accident. Here there is liability to pay weekly payments during incapacity, week by week, if the incapacity continues; and to recompense incurred medical expenses. More must still occur in order to crystallise liability: the relevant week must arrive; the medical expenses must be incurred. This same submission is made by ANZ in para. 19 (p. 15) and para. 21 (pp. 17-18), where the following appears:-

`Applying those tests in the present case, having regard to the provisions of the Accident Compensation Act it could only be said that, from the time at which the injury to the employee occurred:-

a) the Applicant was, by virtue of the terms of the Accident Compensation Act, definitively committed to compensate the employee; and

b) there existed a present liability which would have to be discharged at a future time - i.e. situation could be accurately described as debitum in praesenti, solvendum in futuro.

Following the occurrence of an injury to an employee there was no further act or matter, yet to occur, the occurrence of which was necessary to crystallise the liability of the Applicant...

ATC 4260

The emphasis in those judgments is on identification of a presently existing liability. That did not exist in the Nilsen case because ``the event on which the entitlement of the employees to payment depended had not occurred'' (at p. 628). It is different in the present case. The only event upon which entitlement to receive compensation depended was the occurrence of an injury, and that had occurred. Thus, liability on the part of the Applicant was complete, although not yet discharged.'

It is submitted that there was in 1986 simply no debitum in praesenti to which ANZ was liable in respect of future weekly payments and future medical expenses. More still had to occur before the ANZ was `completely subjected' to liability in respect of such payments: the relevant week had to arrive or the relevant medical expenses had to be incurred. Moreover the cases relied on by ANZ are insurance cases. Here ANZ was a so-called `self-insurer' (a contradiction in terms: a self-insurer is simply uninsured) doing no more than carrying its own obligations to pay in the future.

E. Not capable of reasonable estimation

20. Even if it were possible to find a liability it would still be necessary, as its amount is not certain, for it to be capable of being reasonably estimated for a deduction to be obtained. In RACV Insurance Pty Ltd v. FC of T [74 ATC 4169] [1975] V.R. 1 Menhennitt J held that the taxpayer, an insurance company, was entitled to deduct as a loss or outgoing under section 51 an amount reasonably estimated to be the total liability which it would have to pay in respect of its liability to indemnify insured drivers against claims by third parties incurred , but not reported during the year of income: see Nilsen Development Laboratories v. FC of T [81 ATC 4031] (1981) 144 CLR 616 at p. 632 per Mason J. Unlike the case in RACV Insurance, and unlike the case in Commercial Union Assurance Co of Australia Ltd v. FC of T 77 ATC 4186, the evidence for the ANZ was that the amounts were incapable of reasonable estimation despite their best endeavours. Mr Coull tendered in evidence a letter from the ANZ's actuaries, Messrs. Towers, Perin, Forster & Crosby dated 6 March 1987 (DCC 7). That letter emphasised the difficulty of reasonable estimation of the claims that the ANZ could have in the future. The difficulty at the time stemmed in part from the limited historical claims data, the number and amounts of claims being relatively small and volatile as well as the expectation that the major changes to the Victorian Workers Compensation system was `expected to dramatically alter the claim run-off pattern'. The author of that letter expressly sought to emphasise that `the date upon which the analysis has been performed is necessarily limited and volatile and [that] this must detract from the reliability of the result to some extent'. The letter read (in part):-
   '6 March 1987
   Mr D Coull
   Manager, Workers Compensation
   ANZ Banking Group Limited
   55 Collins Street
   Melbourne Vic 3000
              
Dear Mr Coull,

VICTORIAN WORKERS' COMPENSATION LIABILITY: OUTSTANDING CLAIMS ESTIMATES

Following our meeting and discussions on this matter, I have completed my investigation of the Bank's workers' compensation outstanding claims liabilities for Victoria as at 31 August 1986. I apologise for the delay in this report.

Data

Only limited historical claims data, for accident years 1983/84 and 1984/5, were available for the pre-WorkCare arrangements administered on your behalf by Royal Insurance Australia Ltd.

A Bank schedule was provided setting out post-WorkCare claims experience from 1 September 1985 to 31 August 1986 inclusive. The schedules incorporated individual claim details including amounts paid to date and Company estimated outstanding liability.

A summary of the details provided is set out in Appendix A.

ATC 4261

Method

In estimating the outstanding claims liabilities. I have not been able to apply any of the standard statistical techniques to the historical claims run-off data for a number of reasons:

• historical data is limited ,

• the number and amount of claims processed each year are relatively small and volatile ,

• the major changes to the workers compensation system, particularly the change from lumps sums to pensions, are expected to dramatically alter the claim run-off pattern .

My approach in the circumstances has been as follows:

• Estimate total claims numbers (including number of IBNR claims) based on past trends. This assumes the timing of claims reported will not change dramatically following the introduction of WorkCare.

• In the case of the majority of claims which are relatively small, I have relied on Bank estimates. However, I have adjusted these estimates to take account of claims inflation, investment earnings, and claims expenses as appropriate over the period the claims are expected to be paid. The Company estimates were also compared roughly to historical trends for consistency.

• In the case of the remaining potentially large claims (long term pensioners), I have valued the `worst case' situation of the claimant never coming back to work and reducing this amount to reflect the probability of the claimant recovering and possible recoveries from Royal Life. The probability factor was derived by discussion of the individual claims with you.

Assumptions

The following assumptions have been made in arriving at my results:
Claims Inflation--
Small Claims:                   1.2 times Average
                                Earnings
Pension
Increases--
Long Term:                      Average Pensioners
                                Weekly Earnings
                                (DMB prescribed)

Investment
Returns:                        10% p.a.*
Claims
Administration
Expenses:                       0% and
                                alternatively 8% of
                                future claim
                                payments
              
* Assumed to be earned notionally on the Bank's outstanding claims provision. In theory assets equal to the amount of the Bank's provision could be set aside and invested. The investment income earned would offset partially the claims inflation likely to be incurred in future. In practice the assets may be invested in the Bank's own activities, in which case the Bank's internal rate of return can be notionally assigned to the provision.

I consider these assumptions to be relatively conservative , but appropriate given the uncertainty surrounding the run-off of claims incurred following the introduction of WorkCare.

Comments on Data

Examining first the `number of claim' details in Appendix A, I would suggest that the claim rate per employee has increased somewhat as a result of the introduction of WorkCare. (This assumes the number of covered employees in each accident year has remained relatively constant.) It is possible, if not probable, that the new recording system for claims will reduce IBNR experience below that suggested by the Royal Statistics. This may reduce the apparent claim rate slightly .

Despite the number of claims increasing since WorkCare commenced, the total claim cost estimates by the Bank suggest at first glance that WorkCare has been very successful in reducing claim amounts (the claim cost per accident year has reduced from an average $1.7m pre-WorkCare to less than $1.0m post-WorkCare, even allowing for IBNR's). This result, although possible, is unlikely to eventuate unless the

ATC 4262
Bank is lucky in avoiding any long term pensioners, and has dramatically reduced the number and severity of RSI claims. However, I agree with your assessment that rehabilitation may be very successful in the case of the Bank because of the nature of the work performed and the wide variety of alternative jobs available to past claimants .

Following discussions with the Bank it was noted that there were 5 potentially large claims for which it is arguable that original outstanding claims estimates may be optimistic. It is very difficult to place a liability on these cases at such an early stage since the success of rehabilitation arrangements is not known . It was agreed to assign liabilities to these cases on an individual basis, since they are likely to be the major part of the total liability.

Allowance for IBNR Claims

Allowance for IBNR claims has been made for the year ended 31 August 1986 based on run-off details for the prior accident years 1983/84 and 1984/85, rated down slightly. As noted previously, this approach may well prove to be too conservative, but is a reasonable starting point .

RESULTS

Small Claims 1/9/85 - 31/8/86

The Bank's estimated liability as at 31 August 1986, in respect of all outstanding claims reported to 31 August 1986, was $317,000. Building in an allowance for IBNR claims, the estimate becomes $420,000. This is calculated as:
                            ----------------

     Total Reported Claims lia.       Total Est Claims incl IBNR
     --------------------------   x   --------------------------
                                         Total Claims reported

            less Claims Paid for 12 months =      574 + 70
            ($524,000 paid + $317,000 o/s)     x  --------
                                                     574

            less $524,000 paid
            = $420,000
              
The above figure includes estimates totalling $85,000 for 5 Potential long term Pensioners (Agacy, Burton, Frederick, Iladi and Price). Since it is intended to treat these claimants separately this amount should be deducted from $420,000, leaving $335,000. After discussions with you it was agreed to reduce this figure by 15% as a realistic adjustment for anticipated recoveries from the previous insurer and the motor accident board. This leaves an amount of $285,000.

Adjusting for claims inflation and anticipated investment returns over the period these claims are likely to be paid, the liability for small claims becomes $ 287,000 . This figure assumes a zero allowance for claims expenses. If an alternative allowance of 8% of claim payments is adopted, the liability becomes $ 310,000 .

Potential Large Claims 1/9/85 - 31/8/86

Details used to calculate the outstanding claims liabilities for the 5 potential large claims are included in Appendix B. The final estimated liabilities including a 12.2% allowance for IBNR claims (in line with the approach for small claims set out above) are as follows:
                                                   Expense
                                                   -------
                                                  Allowance
                                                  ---------
                                                Nil       8%
                                               -----    -----
                                               $'000    $'000
           Agacy                                 37       40
           Burton                               190      205
           Frederick                             24       26
           Iladi                                 81       87
           Price                                 82       89
           IBNR allowance                        50       55
                                               -----    -----
                                                464      502
                                               -----    -----
              
Total Outstanding Claims liability as at 31 August 1986

My results can be summarised as follows:
                
                                                   Expense
                                                   -------
                                                  Allowance
                                                  ---------
                                                Nil       8%
                                               -----    -----
                                               $'000    $'000

           Small Claims                          287      310
           Large Claims                          464      502
                                                ----     ----
                                                 751      812
                                                ----     ----
              
I suggest the Bank's outstanding claims provision be set at $ 750,000 or $ 810,000 depending on whether or not an allowance for claims expenses is desired.

Projected Liability as at 31 August 1987

Under the guidelines provided for the actuarial valuation of ANZ's workers' compensation portfolio, I am required to estimate the projected value of the liabilities calculated above at a date 12 months from the date of this valuation. The projected liability as at 31 August 1987 is $ 563,000 if no allowance for claim expenses is made, and $ 608,000 if no allowance for claim expenses is made, and $ 608,000 if an allowance for claim expenses is made.

Please note that the above estimate does not include outstanding claims liabilities in respect of the 1987 accident year. However, the estimate has been updated for assumed inflation up to 31 August 1987.

* * *

The above details represent my best estimate of the outstanding claims liabilities of ANZ Banking Group's Victorian Workers' Compensation portfolio as at 31 August 1986. However, I should emphasise that the data upon which the analysis has been performed is necessarily limited and volatile, and this must detract from the reliability of the result to some extent.

I trust that this report meets your current requirements. However, if you wish to discuss any matters further please contact me.

Yours sincerely,

S.M. Bone

Fellow of the Institute of Actuaries of Australia' (Underlining of passages supplied.)

21. The contents of the letter were accepted as accurate by those at the ANZ making the estimations. Mr Coull accepted in cross- examination the underlined portions of the letter (T. 38 1. 34 - T. 41 1. 34). He accepted that the data on which the analysis was based was `limited and volatile' T. 41 11. 35-6; that it was only possible, in view of the limitations in the material used, to make a very inadequate estimate T. 41 11. 42-5; and that at the time it was done, it was known that the result was likely to be very unreliable, because the material was not adequate to make a reliable estimate T. 42 11. 15-18. In response to a question that it was his view that it was difficult to place liability on the five potentially large cases at the stage the estimate was being made, Mr Coull said `Yes, it was pretty much a lottery how they would turn out' (T. 41 1. 25). In Commonwealth Aluminium Corporation v. C of T 77 ATC 4151 at pp. 4160-1 Newton J said:-

`For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss or outgoing which has been ``incurred'' within the meaning of section 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p. 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation: see Texas Company (Australasia) Ltd v. FC of T (1940) 63 CLR 382 at pp. 465-6 per Dixon J: and RACV Insurance Pty Ltd v. FC of T 74 ATC 4169 at pp. 4176-77; (1975) VR 1 at pp. 8-9: compare
Henderson v. FC of T 70 ATC 4016 at pp. 4018-19; 119 CLR 612 at pp. 647-8 per Barwick CJ and
Commr. of Stamps (W.A.) v. The West Australian Trustee Executor and Agency Co. Ltd (1925) 36 CLR 98 especially at pp. 104-5 per Knox CJ. In this context I think that the quantum of a liability is ``capable of reasonable estimation'', if it is capable of approximate calculation based on probabilities: see para 2 of the definitions of the noun ``estimate'' in the Shorter Oxford English Dictionary 3rd ed.

ATC 4264
(1950); see too
J.J. Savage & Sons Pty Ltd v. Blakeney (1970) 119 CLR 435 at p. 442.'

It is clear that the liabilities here in question were not `capable of approximate calculation based on probabilities', even though what was done was the best that could be done in the circumstances and accordingly reasonable in that sense. Mr Coull's statement that the actuary told him orally `of an amount that they considered would be a reasonable range of estimate' (Affidavit 17 February 1992 para. 14) ought to be understood in this sense in view of the fact that he described the actuary's letter DCC7 as `a detailed letter of confirmation', and of his own evidence.

22. The fact that Coull's estimate, while the best he could achieve, was not regarded as a satisfactory approximation is confirmed by the fact that the amount of his estimate which was for 13 months (not 12) was regarded as confirmed by the amount of the actuary's estimate which was for 12 months (not 13) T. 42 1. 19 T. 43 1. 9.

23. Further, that estimate turned out to be very inadequate T 42 C1 10-16. This, of itself, would not show that the amount was not capable of approximate calculation based on probabilities, for there might be an explanation for the discrepancy consistent with that fact. But the explanation here lies in the inherent difficulties in making the calculation in the first place, because (inter alia) the WorkCare system was new and the underlying data basing the calculation was accordingly inadequate. In these circumstances the ultimately demonstrated gross inadequacy of the estimate goes to prove that it was not possible to make a reasonable estimate in the first place.

F. The relevance of accounting evidence

24. The ANZ seeks to rely upon the evidence of expert accountants and accounting practice (paras. 18 and 19 (pp. 8-9) and para. 12 (p. 12)). The fact that an accountant would prepare the accounts showing the liability is neither relevant nor helpful. It is not relevant because, as has been said in previous cases, the tests of deductibility under section 51 of the ITAA does not depend upon commercial usages but the statutory criterion of section 51(1) of the ITAA. Nor is it useful because many amounts are shown as liabilities in the accounts of taxpayers for accounting purposes unrelated to deductibility. Thus, for example, Mr Lamble accepted in cross- examination that the accounts of the ANZ should show as liabilities such matters as the provision of the long service and annual leave, the liability for the repayment of borrowed sums and the liability for payment of capital purchases though none of these would be deductible on revenue account under section 51(1) of the ITAA (T. p. 64):

`MR PAGONE: Well, long service leave, Mr Lamble, would be an example of a liability that would be put in the accounts as a liability, would it not?... Yes.

And indeed the liability to repay a capital borrowing would be another liability to be shown in the accounts?... Yes, it would.

And not only the borrowings, but the obligation to pay a capital sum; for example the final instalment on some item of plant and equipment would be an amount that would be included as a liability in the accounts?... Yes.

And all of these matters would not be ones that you would be entitled to a tax deduction for, ordinarily?... That is so.

Yes. Now, Mr Lamble, you have not yourself looked at any of the individual claims which are the subject of a workers compensation claim under the act, have you?... In this particular circumstance?

In this particular case, in the ANZ's case?... No, I have not.

So you are not yourself able to make any statement about whether the amounts included in the claims listing were reasonable estimates?... No, I am not.

And you yourself would not be able to say whether indeed any of them are claims which may be legally enforceable against the ANZ Bank?... No, I am not.

And, Mr Lamble, when you say in paragraph 8 that in your view both of those types claims constitute liabilities within the meaning of the expression - I am sorry, within the meaning of that expression - as defined in SAC4, in that

ATC 4265
they constitute future sacrifices which are both probably [incapable] of estimation we must understand that in the context of information supplied to you, so you have made assumptions that they are both liabilities and they are in fact capable of estimation?... That's right.'

Thus, the evidence of Mr Lamble (an expert in accountancy and commercial usage) established against the ANZ's case that:

(a) amounts are shown as liabilities in accounts even when it is accepted that a tax deduction is not allowable;

(b) the amounts in question were assumed to be liabilities;

(c) the amounts in question were assumed to be capable of estimation.

G. Subsidiary companies

If the respondent is wrong in his contention that the applicant is not entitled to a deduction under s 51(1) of the Act in respect of the provision of $757,898.00 the respondent would contend that the applicant did not incur a deductible liability in relation to that part of the provision which relates to its subsidiary companies.

(i) Esanda Ltd for the sum of $3675.00 refer to the applicants Particulars dated 6 May 1992 para. 9A(A)(a) on page 8;

(ii) ANZ Executors and Trustee Co. Ltd for the sum of $4263.00 refer to the applicants Particulars dated 6 May 1992 para. 9A(A)(a) on page 8,

as the sums referred to were not losses or outgoings incurred in the course of gaining or producing assessable income of the applicant.''

The Applicant's Submissions In Reply read as follows:

``1. The Commissioner's submissions, in summary, are to the effect that amounts in respect of claims reported but not paid, and claims incurred but not reported, were not losses or outgoings `incurred' by the Applicant in the 1986 year within the meaning of s. 51(1) of the Income Tax Assessment Act 1936 because:-

a) liability did not crystallise until the time at which weekly payments were due to be paid, or medical expenses were incurred by the injured worker;

b) alternatively, even if liability crystallised at the time of injury, deductibility of estimated liabilities was not allowable on the basis of the principle identified in RACV Insurance v. Federal Commissioner of Taxation [74 ATC 4169] [1975] VR 1, because such liabilities were not capable of reasonable estimate.

TIME AT WHICH LIABILITY AROSE

2. The first point made by the Commissioner is to the effect that no liability on the part of the Applicant to its injured workers arose `until the passing of the week in respect of which the weekly payments in question fell due or the injured worker incurred the relevant medical expense' (para. 7, p. 5). Pages 5, 19 of the Commissioner's outline were directed to that issue.

3. The submissions on behalf of the Commissioner with respect to that point seem capable of being summarised as follows:-

a) benefits payable under the Accident Compensation Act to injured workers are, substantially, weekly payments, or reimbursement of medical expenses;

b) entitlement on the part of the worker to payment does not arise until after the passing of the week to which the payment relates, or after the relevant medical treatment has been provided (para. 11, p. 10);

c) as a consequence, notwithstanding the occurrence of an injury `more must still occur in order to crystallise liability: the relevant week must arrive; the medical expenses must be incurred.' (Para. 19, p. 19);

d) it follows that no loss or outgoing is `incurred' until the time of the obligation to make payment.

4. The Applicant disputes paragraphs (c) and (d). In the Applicant's submission, the provisions of the Accident Compensation Act dealing with the time at which an injured worker shall receive payments do not have any consequence in relation to the time at which the liability of the Applicant is established.

5. The submissions on behalf of the Commissioner stated, after referring to

ATC 4266
passages cited from Nilsen Development Laboratories Pty Limited v. Federal Commissioner of Taxation (1981) 144 CLR 616, and Ogilvy & Mather Pty Limited v. Federal Commissioner of Taxation 90 ATC 4836, that:-

`From these passages it may be seen that a liability is not relevantly incurred where the obligation to pay has not arisen.'

(para. 15, p. 14)

6. What is meant by that statement is not entirely clear. On one reading it might be understood as stating that a liability cannot be incurred until the time for payment has fallen due. Such a proposition is not supported by the authorities referred to. Further, it would clearly be inconsistent with established authority. In
Federal Commissioner of Taxation v. Australian Guarantee Corporation Limited 84 ATC 4642; (1984) 54 ALR 209, the liability to pay interest in respect of `deferred interest debentures' was held to have arisen, and to have been `incurred' for the purposes of s. 51(1), notwithstanding that the interest would not fall due for payment until many years later. In identifying recognised principles in this area, Toohey J. stated as follows (at pp. 213-214 [ATC p. 4645]):-

`It is well established that an outgoing may be incurred though the sum in question has not been paid or the liability discharged. New Zealand Flax Investments Ltd v. FC of T (1938) 1 AITR 366 at 378; 61 CLR 179 at 207 and FC of T v. James Flood Pty Ltd (1953) 88 CLR 492 at 507. In a passage from his judgment in the former decision, referred to with approval by the Court in the latter, Dixon J. said:

``To come within that provision there must be a loss or outgoing actually incurred. `Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more that impending, threatened, or expected.''

In James Flood at 88 CLR 507 the Court, in a reference to
W Nevill & Co Ltd v. FC of T (1937) 56 CLR 290, said that nothing there decided ``was intended to imply that a liability to pay an ascertained sum is never incurred until the sum becomes due and payable''.

It is also well established that an outgoing may be incurred in the sense that a taxpayer may completely subject himself to a liability even though the liability is defeasible. The authorities are noted by Newton J in Commonwealth Aluminium Corp Ltd v. FC of T 77 ATC 4151 at 4160-61.'

7. After referring to the judgment of the High Court in Nilsen Development Laboratories Pty Ltd v. Federal Commissioner of Taxation (supra) and to the judgment of the Privy Council in
Inland Revenue Commissioners v. Lo & Lo (1984) BTC 281, Toohey J. concluded as follows (at p. 218):-

`Nilsen stresses the need for a presently existing liability before there can be an outgoing incurred within s. 51. But the case is distinguishable from the matter now before this Court. It was concerned with the entitlement of employees to long service and annual leave and the obligation of the taxpayer to pay employees during the period of such leave. The employees were not entitled to the payment of money in the sense in which, as mentioned, the employees in Lo & Lo were entitled to payment. In Nilsen there was no accruing liability on the part of the employer, simply an obligation to pay wages when employees became entitled to and took leave. In the case now under appeal the taxpayer's obligation to pay interest under deferred debentures arose when the debentures were issued though subsequent events would determine the precise amount of interest to be paid.'

8. The Commissioner's argument present under consideration focuses attention entirely upon the time at which the injured worker is entitled to receive payment.

Similarly, the Commissioner's arguments in the Australian Guarantee Corporation case relied upon placing emphasis upon the time

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at which debenture holders would be entitled to receive interest payments. The error in that approach was pointed out by Toohey J. (54 ALR at p. 215-6 [84 ATC 4642 at p. 4646]):-

`But the question now before the Court is not one of the circumstances in which an investor is entitled to be paid interest. The question is whether during the relevant income year the taxpayer subjected itself to a liability to pay interest under the deferred debentures. In my view it did so.'

9. The Commissioner's submissions in the present case suffer from that defect. They focus upon the time at which the injured worker is entitled to receive payments, and seek to extrapolate from that a conclusion in relation to the time of the crystallisation of liability on the part of the Applicant. That approach should be rejected here as it was in the Australian Guarantee Corporation case.

10. In the Applicant's submission, the error in the Commissioner's approach is a failure to recognise that the present situation is (as in Australian Guarantee Corporation, RACV Insurance and Commercial Union) truly a situation of debitum in praesenti, solvendum in futuro - liability crystallising at the time of the injury, but to be discharged by future payments.

11. The Commissioner's reasons for asserting that liability only crystallises at the time of payment is not supported by identification of some further event which must occur as a `trigger'. It is merely asserted that that which must occur in order for liability to arise is that `the relevant week must arrive; the medical expenses must be incurred' (para. 19, p. 19).

12. The argument is erroneous in that it treats the mere effluxion of time as an event which must `occur' in order to crystallise liability. It is submitted that the mere passage of time cannot be an event the occurrence of which is the critical matter which crystallise liability. Liability is complete upon the occurrence of the injury. Subsequent matters merely go to:-

a) determination of the precise amount of the liability; and

b) determination of the time or times at which the liability must be discharged.

13. Other instances of deferred payments, or payments made periodically, provide no support for the argument that the mere passage of time will, by itself, be the event which crystallises liability. In the context of borrowed monies, it is not the passage of time which crystallise the liability to interest, but rather the borrower having the use of the borrowed funds over time. In the context of salary or wages, it is the performance by the employee of his duties which crystallises liability. The present situation is completely different. Arriving at a particular point in time is not an `event' the `occurrence' of which crystallises liability.

14. The Commissioner's argument by analogy to future wages is developed at para. 18 (pp. 17-18) of his submissions. The critical difference from the present situation (i.e. the necessity for the employee to render services) is overlooked. With respect to the Applicant's liability to pay compensation to injured workers, the paragraph concludes with the following statement:-

`Obviously an injured worker may die, for reasons quite unconnected with his injury, and if he or she does, no further liability to pay weekly payments, or to pay medical expenses, can arise.'

15. It is erroneous to identify such events as relevant to the crystallisation of the liability to pay compensation. Such matters are relevant not to the crystallisation of liability, but rather to the extinguishment of an existing liability. They are events which may cause a defeasance of the liability. They are matters of the type commented upon by Newton J. in Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation 77 ATC 4151, in the following terms (at p. 4161):-

`It may incidentally be remarked that all, or almost all, unpaid liabilities are in a sense defeasible, because they could in the future be forgiven by the creditor, or cancelled by Act of Parliament, or barred by an applicable statute of limitations.'

16. In Commercial Union Assurance Co of Australia v. Federal Commissioner of Taxation [77 ATC 4186] (1977) 14 ALR

ATC 4268
651, a deduction was allowed in respect of claims incurred but not reported and relating to insurance business carried on through an `underwriting pool'. The insurance activities of the pool `comprised practically all forms of insurance business except life assurance' (14 ALR at p. 654.3 [77 ATC 4186 at p. 4188]), and included workers compensation insurance (p. 656.2 [ATC p. 4190]). The provisions of the Workers Compensation Act 1958 (Vic), the predecessor to the Accident Compensation Act, provided for the payment of similar benefits to injured workers - that is, weekly payments - see s. 9(2). The Court in that case did not, however, take the view that the payment of weekly benefits in respect of workers compensation had the consequence that liability was only `incurred' when payment was due to be made.

ESTIMATION OF LIABILITIES

17. With respect to the estimates to be made by the Applicant of liabilities falling into the `reported but not paid' category, the position at the end of the year of income is that:-

a) the claims were known;

b) the nature of the injuries suffered by workers were known;

c) the wages being paid to those employees, upon which benefits would be based, were known;

d) the estimates of future liability were to be made by employees of the Applicant who had substantial experience in relation to workers compensation matters (Mr Coull and Mr Jubb).

18. With respect to claims `incurred but not reported', having regard to the nature of the potential claims such information was not available to the Applicant. However, there was reliable information available to the Applicant (through the evidence of Mr Wilson) that an appropriate figure to adopt for the incurred but not reported category was 25% of the claimed but not paid category.

19. Having regard to those matters, and to the conclusions arrived at by the Courts in RACV Insurance Pty Limited v. Federal Commissioner of Taxation [74 ATC 4169] [1975] VR 1, and Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation [77 ATC 4186] (1977) 14 ALR 651, one would expect that it would be concluded that liabilities in respect of both claims reported but not paid, and claims incurred but not reported, would be said to be capable of reasonable estimation by the Applicant. The Courts did not, in those cases, take the view that a high level of exactitude was required with respect to the estimate to be made. One finds no support in those cases for the limitation that the Commissioner asks the Court to impose in this case.

20. The Commissioner, however, seeks to rely upon two matters in support of the argument that liabilities of the Applicant in both categories were not capable of reasonable estimation:-

a) the oral evidence of Mr Coull (Transcript p. 41-42);-

b) the letter from the actuaries, Towers Perin Forster & Crosby, to the Applicant (Ex. DCC7) which expressed qualifications in their making of an estimate.

21. It is not appropriate to conclude, having regard to that evidence, that either the liabilities in respect of claims reported but not paid, or claims incurred but not reported, were not capable of reasonable estimation i.e. were not `capable of approximate calculation based on probabilities' (Commonwealth Aluminium 77 ATC, at p. 4161).

22. It would be erroneous to place significance upon the subjective impressions of Mr Coull. The information available to him, and the method utilised to make estimates, were the same as those found to be acceptable in the RACV case. In addressing the question as to whether the liabilities were `capable of approximate calculation', the subjective impressions of Mr Coull as to difficulties of the task cannot, it is submitted, outweigh judicial endorsement of the very same technique in other circumstances. What mattered was that, having regard to the matters referred to in para. 17 above, the liabilities were capable of approximate calculation.

23. With respect to the Towers Perin letter, qualifications expressed in it must no doubt be understood as based in part on

ATC 4269
understandable professional caution in relation to an exercise of making estimations. Such qualifications as were expressed in Ex. DCC7 cannot be read as suggesting that the actuaries thought the liabilities to be incapable of `approximate calculation based on probabilities'. If they had thought that, no doubt they would have said so, and refused to make an estimate. The fact that a firm of actuaries was prepared to make the estimate, and calculate a figure in respect of anticipated liabilities, supports the conclusion that they thought the task one which was capable of being properly discharged. Furthermore, Towers Perin made it clear in their letter that they had developed and followed a specific method for the purpose of making an estimate of the liabilities (Ex. DCC7 at p. 2).

24. This is the first time at which this issue has emerged. It was not raised in the Commissioner's outline filed prior to the case (pp. 5-7).

25. Neither was it raised at the hearing. The particulars referred to at p. 31 of the Commissioner's submissions were not tendered, and are not in evidence.

26. The affidavit of Mr Coull dated 17 February 1992 referred, at para. 6, to the Applicant providing the services of its employees to Esanda Finance Corporation Limited and to ANZ Executors & Trustees Company Limited. Mr Coull was not cross examined on that matter.

27. In the Applicant's submission, the appropriate conclusion to be drawn, on the evidence, is that any Workcare liabilities incurred in respect of persons working with those two subsidiaries were in respect of employees of the Applicant whose services were provided to the subsidiaries.''

In the main, I have found the submissions of the Commissioner more persuasive than those of the applicant, but I have not derived any assistance from the Commissioner's suggested analogy between future wages due to employees and the position in the present case, especially in view of the current economic position and its effects on staff levels.

In my opinion, the liabilities which the ACA placed upon the applicant are quite distinct from those of an insurer. The applicant simply was not insured. It was not a party to a policy of insurance; it paid no premium; it was not entitled to be indemnified by a third party. Under the ACA it was accepted as a ``self- insurer'' and required by it to keep accounts in accordance with its terms. The liability of the applicant under the ACA was to make certain payments on the happening of the events to which it referred. Those events included total or partial incapacity giving rise to an obligation to make weekly payments ``before the expiry of seven days after the end of the week in respect of which it is payable'' (s. 119(4), above). They included the payment of the reasonable costs of medical and like services incurred by a worker, the entitlement to which arises only when the medical service or treatment has been provided. They also included the possible death of the worker. If the injury suffered resulted in or materially contributed to his death a lump sum was payable upon death to his dependants.

The statutory liabilities imposed upon the applicant by the ACA are, in my opinion, indistinguishable in principle from the statutory obligation to pay long service leave and annual holiday pay which were considered in such cases as Flood and Nilsen (cited above). I do not consider that the insurance cases cited above can properly be applied to the facts of the present case. In the RACV case (see para. 30 of the applicant's submissions above) Menhennitt, J observed:

``The liability to indemnify in respect of events occurring in the year of income is, it seems to me, properly to be regarded as incurred in gaining or producing the assessable income of that year because it is out of that year's premiums that the liability is to be met.''

Here, the applicant is not an insurer but is placed under a direct statutory obligation to make payments, not out of premiums payable in the year of income, but from its general funds.

The amounts claimed by the applicant as deductions which the Commissioner disallowed were not in my opinion, ``incurred'' in the year of income within the meaning of s. 51(1) of the Act. The fact that provision was made in the applicant's 1986 accounts for its future Workcare liabilities does not justify a conclusion that those liabilities were then incurred. (See the passages cited above from Nilsen at pp. 624-5, 626-7 and 628-30 [ATC pp. 4035, 4036 and 4037-4038].)

ATC 4270

In any event I would accept the submissions of the Commissioner based upon the evidence set out above by his counsel that none of the deductions so claimed was capable of reasonable estimation, within the meaning of the authorities cited, and accordingly that they were properly disallowed.

I do not find it necessary to consider the belated submission on behalf of the Commissioner that the applicant did not incur a deductible liability in relation to that part of the provision in its accounts which related to its subsidiary companies specified in paragraph G of the Commissioner's submissions.

Luxury motor cars

The applicant outlined its case as follows:

``OUTLINE OF FACTS

1. The Applicant, in the course of its banking business, entered into finance leases pursuant to which it leased motor vehicles to its customers.

2. Such motor vehicles included vehicles the cost of which exceeded the depreciation limit specified in s. 57AF of the Income Tax Assessment Act 1936 (in 1986, an amount of $26,660).

3. Upon disposal by the Applicant of such leased vehicles, it was necessary to determine whether there was allowable as a deduction to the Applicant a balancing adjustment determined in accordance with s. 59(1) of the Income Tax Assessment Act. With respect to that calculation, the provisions of s. 59(6) had the consequence that the balancing adjustment was calculated having regard to the limitation provided by s. 57AF.

4. Adoption of the procedure described in the preceding paragraph had the consequence that where a vehicle was sold by the Applicant at a loss, only part of that loss gave rise to a deduction pursuant to the balancing adjustment provisions of s. 59(1).

5. Accordingly the Applicant claimed as a deduction, pursuant to s. 51(1) of the Income Tax Assessment Act, that part of the loss on sale of each vehicle which was not allowable as a deduction pursuant to the balancing adjustment provisions of s. 59(1).

6. The total amount of the deduction claimed by the Applicant pursuant to s. 51(1) for the 1986 year of income was an amount of $782,841.

7. The Commissioner disallowed the Applicant's claim for deductions in respect of those losses. The Applicant now appeals against that disallowance.

OUTLINE OF SUBMISSIONS

8. In respect of plant and articles purchased by the Applicant for use in its business, the depreciation provisions of the Income Tax Assessment Act (s. 54 to s. 62) do not provide an exclusive code as to what are allowable deductions:

Memorex Pty Ltd v. Federal Commissioner of Taxation [87 ATC 5034] (1987) 77 ALR 299, at 305.2.

9. As the Applicant carries on business as a bank, any profit which it realised upon the sale of motor vehicles purchased by it for leasing to its customers would be assessable income in its hands. The balancing adjustment provisions of s. 59(2) would include in assessable income any recaptured depreciation deductions. However it is clear that any profit arising above and beyond that amount would be income within ordinary concepts, and included in its assessable income pursuant to s. 25(1):-

Federal Commissioner of Taxation v. Myer Emporium Limited (1987) 163 CLR 199

London Australia Investment Co. v. Federal Commissioner of Taxation [77 ATC 4398] (1977) 138 CLR 106

Memorex Pty Limited v. Federal Commissioner of Taxation (supra)

Federal Commissioner of Taxation v. GKN Kwikform Services 91 ATC 4336

10. What the Applicant relies upon here is the principle which is the logical corollary of the assessability principle referred to in paragraph 9. That principle is to the effect that losses suffered by a bank upon the sale of leased motor vehicles, to the extent that they are not deductible pursuant to s. 59(1), are nevertheless deductible pursuant to s. 51.

11. The principle relied upon by the Applicant is consistent with that relied on by Barwick CJ and Mason J in

ATC 4271

AGC (Advances) v. Federal Commissioner of Taxation [75 ATC 4057] (1975) 132 CLR 175, in holding that unpaid hire purchase instalments were deductible pursuant to s. 51(1), although they were not deductible pursuant to s. 63 - Barwick CJ at p. 184 [ATC p. 4063].

12. To the same effect is the decision in Federal Commissioner of Taxation v. National Commercial Banking Corporation of Australia 83 ATC 4715, where it was recognised that losses in respect of bad debts may be deductible under s. 51(1), although not deductible under s. 63.''

The respondent's outline read as follows:

``A. Disposal of luxury cars

2. The ANZ is in the business of banking. Part of that business includes providing finance to its customers. The provision of finance is sometimes done by acquiring luxury motor vehicles which the ANZ then leases to its customers.

3. The ANZ does not acquire the luxury motor vehicles as part of its trading stock and does not treat the luxury motor vehicles as such for the purposes of section 28 of the Act. It derives income in the form of the lease payments received from its lessee customers.

4. At the end of the leases the luxury motor vehicles are sold at less than the price for which they were purchased. The ANZ claims that it is entitled to a deduction for that difference to the extent (if any) that the amount has not received a deduction by way of depreciation.

Sections 51 and 59 mutually exclusive.

5. A deduction for that difference is not allowable under section 51(1) (on revenue account) in respect of property which is depreciable under section 54, and which has been depreciated under that section (on capital account).

Section 59 gives a deduction in terms of the whole property.

6. The ANZ is entitled to a deduction by way of depreciation on the capital value of luxury motor vehicles pursuant to section 54 of the Act. Section 57AF limits the deduction that may be claimed for depreciation of luxury motor vehicles.

7. Section 59 of the Act deals with any adjustment to tax liability that may be occasioned by the disposal of property which had been depreciated under the Act. Broadly speaking, if the taxpayer receives more on disposal than its depreciated value, the taxpayer must include in assessable income so much of the `tax deduction' as is represented by the receipt. Similarly, if the taxpayer receives less upon disposal than the depreciated value of the capital item, the taxpayer is entitled to a deduction to the extent of the difference.

8. Section 59(6) provides the mechanism to determine `the consideration receivable' in relation to the disposal of depreciable property covered by section 57AF. The section intends, purports and does allow depreciation over the entirety of the property by substituting a deemed cost for the actual cost of the whole of the property.

9. The adjustment required by section 59 of the Act requires identifying (a) `the depreciated value of the property', and (b) `the amount of any consideration receivable in respect of the disposal'. The first, namely `the depreciated value of the property', is found by applying the statutory definition of `depreciated value' in section 62. That depends upon identifying `the cost of the unit to the person' and `the depreciation (if any) allowed or allowable'. The depreciation allowed or allowable is that allowed or allowable under section 57AF. The second, namely the amount of any consideration receivable in respect of the disposal, is that amount expressly determined by reference to sub-section 59(6) of the Act.

10. The depreciated value of depreciable property when disposed of, less the amount of any consideration received in respect of the disposal, is an allowable deduction under section 59(1), and any further deduction in respect of the value of the property must necessarily duplicate the deduction already made.

11. The deduction is not allowable under section 51(1), not because section 59 constitutes part of a complete code, but because on the facts here in question section 59(1) operates in co-operation with section 59(6) to provide a deduction in respect of the whole of the property.

ATC 4272

F.C. of T. v. GKN Kwikform Services Pty. Ltd. 91 ATC 4336.

Hyteco Hiring Pty. Ltd. v. F.C. of T. 92 ATC 4216.

Memorex Pty. Ltd. v. F.C. of T. 87 ATC 5034.

No loss.

12. In any case any supposed loss suffered by the ANZ on a motor vehicle can only be calculated after taking into account all outgoings in respect of the motor vehicle and all receipts in respect of it. There is no suggestion that on this footing the ANZ suffered a loss at all; in fact it made a profit.

Any loss is a loss of capital.

13. Any loss occasioned on the disposal of the luxury motor cars is in any case a loss of a capital nature and excluded from deduction under section 51(1).

Sun Newspapers Limited and Associated Newspapers Limited v. F.C. of T. (1938) 61 C.L.R. 337.

Hyteco Hiring Pty. Ltd. v. F.C. of T. 92 ATC 4216.''

The applicant, in its final written submissions set out the facts in more detail. Portions of those submissions read as follows:

``1. In the adjustment sheet accompanying the Applicant's assessment for the income year ended 30 September 1986 the Respondent added, inter alia, an amount of $782,841 being disallowance of `Lease- Finance Loss on Disposal of Luxury Motor Vehicles' - Exhibit A Folio 34. That amount is claimed in the Applicant's return at Folio 3 of Exhibit A where the following note appears:

`The company, as part of its ordinary business leases assets to customers. In this aspect of its business it has incurred a loss on disposal of luxury motor vehicles. The loss being the actual cost of the leased asset adjusted by the amount of the depreciation limit calculated in terms of Section 57AF less the sale proceeds apportioned to that amount not depreciated. This loss is not reflected in the tax profit/loss on disposal on Schedule 32.5.1.

This loss of $782,841 is claimed under Section 51(1) as an allowable deduction in deriving the company's assessable income.'

2. The business of the Applicant Bank in the year of income ending 30 September 1986 (`the year of income') included the leasing of chattels to customers. The Bank has been carrying on the business of leasing since in or about 1971. This business involves the regular purchase of chattels and the bailment of them to customers of the Bank. When the lease comes to an end the chattels are sold. The purchaser of the chattel may be the bailee or some other person, for example a dealer in chattels of the kind in question, with whom the chattel is traded in. Affidavit Conn para. 3. The Bank does not maintain a fleet of chattels on hand for lease; rather it purchases a chattel identified by the customer and at the customer's request. The method of financing the availability to the customer of that chattel is by way of lease - Conn transcript p. 152.5.

3. The most commonly leased types of chattels which were purchased and leased by the Bank in 1986 were:

(a) motor vehicles;

(b) computers;

(c) other office electronic equipment eg photocopiers, telephone systems, facsimile machines;

(d) other equipment for use in businesses eg restaurant cooking equipment, shop fittings;

(e) non-electronic office equipment eg furniture, partitioning materials - Affidavit Conn para. 4.

4. In the relevant year of income... depreciation cost limit in the relevant year of income. These leases represented assets with a total capital cost of $8,315,816...''

(The total lease rentals derived by the Bank in 1986 were returned as assessable income)

``6. Almost without exception, during the relevant year of income, if a lease of a motor vehicle ran to full term, the vehicle would be sold for a price equal to or less than the residual value specified in the lease. Sometimes the lease was terminated earlier either by default of the customer or by the customer choosing to terminate earlier. In

ATC 4273
the former case the Bank would usually sell the vehicle at auction. In the latter case the customer would pay the pay out figure calculated in accordance with the lease. In either case the sale proceeds received by the Bank were almost invariably less than the cost of the vehicle to the Bank.''

(During cross-examination of Mr Birch, counsel for the respondent asked the witness whether he agreed with the general description of the applicant's business in relation to leases of luxury motor vehicles given by counsel for the applicant in his opening, namely that there was ``neither a nod nor a wink'', but that the ``lessee would offer and the bank would accept to buy the vehicle for the residual value''. The witness agreed and then at page 177 of transcript was asked:

``Well, you could only get a profit if you in fact did what was not contemplated which is, went out and did the tour of the used car dealers and said the residual value is $30,000, will you give me 50 for it. If you did that, you would see a profit? - That's right.

The fact that you did not see a profit suggests that that was never done? - Yes.)''

The submissions continued:

``7. During the relevant year of income leases of luxury motor vehicles entered into by the Bank took the form of the Bank's standard lease documentation. A single lease agreement was used where there was to be a limited number of leases entered into with the customer. A master lease agreement was used to allow authorised signatories of the customer to sign leasing documents avoiding the necessity for execution under common seal. A supplement was incorporated into the master lease agreement from in or about October 1973. These leases are Exhibits JC5. Each of the leases notes that the lessee has no `right or property or interest in or to the goods' and that he is `bailee only thereof' (cl. 5); clauses 7 and 8 deal with payments to be made by the lessee to the lessor consequent upon termination of the leases....

8. When a lease was to be terminated, the pay out figure was calculated by the Lease Accounting Section, advised to the account executive who obtained the termination amount from the customer, and forwarded it to the Lease Accounting Section for processing. Accounting processes were then activated to `retire' the asset from the accounting system employed to record the assets and known as the `COBOL Fixed Asset System' (`COFAS'):- Affidavit Conn para. 15.

9. In respect of leases of those motor vehicles, the actual cost of which exceeded the limit on cost price for depreciation imposed by section 57AF of the Income Tax Assessment Act (`luxury motor vehicles') the Bank's practice was to split the capital cost of the leased vehicle into two notional assets both recorded within the COFAS system. The COFAS input sheets received provided details of the cost of the vehicles which had been leased and also identified these two notional assets, namely the depreciable portion of the vehicle (the `primary asset') and the non-depreciable portion of the vehicle (the `secondary asset'). The depreciable portion of the vehicle was determined by reference to the limit specified within section 57AF of the Act. On the termination of leases of luxury motor vehicles COFAS termination sheets were received, advising the termination amount received and the termination date of the lease. - Affidavit Birch para. 4. (Exhibit `RNB2' to the Affidavit of Mr Birch is a true copy of a form of COFAS termination sheet, completed by way of example only.)

...

11.... On termination of a lease of a luxury motor vehicle, the sale proceeds were apportioned between the notional primary and secondary assets recorded in COFAS. This has been illustrated by reference to two luxury motor vehicles the leases of which were terminated during the year of income being Vehicle No. 040-V2937 which appears on page 191 of Exhibit `RNB3' and page 352 of Exhibit `RNB4' and Vehicle No. 040-N2366 which appears on the first page of Exhibit `RNB3' (which is page 110) and page 345 of Exhibit `RNB4'. Exhibit 2 is a schedule illustrating how the Applicant Bank calculates the loss it has claimed pursuant to Section 59(1) of the Act and the deduction it has claimed under Section 51(1) to the Act in relation to the notional primary

ATC 4274
and secondary assets in relation to Vehicle No. 040-V2987. Exhibit 3 is a schedule illustrating how the Applicant Bank calculates the income pursuant to Section 59(2) and the deduction claimed under Section 51(1) of the Act in relation to the notional primary and secondary assets in respect of Vehicle No. 040-N2366 - see Affidavit Birch para. 9.''

Counsel for the applicant pointed out:

``It should be noted that Mr Birch's evidence makes it clear that the same respective `loss claimed' as appears at the foot of the first page of each of those Exhibits would have been achieved in each case if the asset (vehicle) had not been notionally split into two for the purposes of the COFAS accounting system - transcript 169-170.''

The applicant's submissions continued:

``12. On the last page of Exhibit `RNB4' is an item described as revenue gross profit/ loss in the amount of $800,635.00. This was calculated as the total loss on the sale of the leased luxury motor vehicles the leases for which terminated during the year of income. However, three vehicles which are listed in the schedule namely Nos. 040-N3923, 040-T0066 and 040-T0070 (which appear on pages 346 and 352 of Exhibit `RNB4') were incorrectly included in the schedule. These terminations relate to an earlier year. After excluding these assets the total amount of loss incurred by the Bank on the sale of leased luxury motor vehicles during the year of income claimed pursuant to section 51(1) of the Act is the sum of $772,411.00. That is the total amount which the parties agree is now in issue in these proceedings.''

By section 17 of the Act the applicant was liable to pay tax upon its ``taxable income'', which is defined in section 6(1) as ``the amount remaining after deducting from the assessable income all allowable deductions''.

Before section 57AF was introduced into the Act, a taxpayer carrying on the business of leasing motor vehicles, in the manner adopted by the applicant, would have been entitled to claim depreciation at the prescribed rate in respect of the whole of the purchase price of each vehicle. On the disposal of the vehicle by the taxpayer at the end of the period of the lease the operation of section 59 of the Act would have produced the result that if it received an amount larger than the depreciated value of the vehicle, the excess would have been treated as assessable income (to the extent that a deduction had been allowed) and if it received less than the depreciated value it would have been entitled to a deduction in respect of the difference. In these circumstances there would have been no room for the operation of s. 51(1).

The first two sub-sections of section 57AF provide:

``(1) This section applies in relation to a unit of property (other than an excluded unit of property) being-

(a) a unit of property in respect of which depreciation is allowable under this Act; and

(b) a motor vehicle (including a vehicle known as a four wheel drive vehicle) that is a motor car or station wagon.

(2) Where the cost of a unit of property to which this section applies for the purpose of calculating the depreciation allowable to a taxpayer under this Act in relation to a year of income would, apart from this subsection, exceed the motor vehicle depreciation limit in relation to the year of income (in this subsection referred to as the `year of first use' ) in which the unit of property was first used by the taxpayer (whether for the purpose of producing assessable income or otherwise), then, for the purpose of calculating the depreciation allowable under this Act to the taxpayer in relation to the year of income, the cost of that unit of property shall be deemed to be the amount of the motor vehicle depreciation limit in relation to the year of first use.''

As was pointed out in the respondent's written submission:

``The effect of these provisions is to limit the amount of depreciation that may be claimed in respect of a motor vehicle. The limit is not imposed by reducing the rate of depreciation that may be claimed, but rather, by imposing a maximum amount that may be the subject of a claim for depreciation in respect of motor vehicles. That amount is calculated by reference to a formula in the subsections which follow those set out above.''

In its final written submissions the applicant said that the assets in question in this case are

ATC 4275

not fixed capital assets of the taxpayer's business, nor are they trading stock. ``They are, in a sense, `revenue' assets. The cost of the asset is not deductible. The proceeds of sale are not entirely assessable. But the profit on sale is.
London Australia Investment Co. Ltd v. FC of T 77 ATC 4398; (1976-1977) 138 CLR 106 was the first case to establish that proposition.''

It was there so held, counsel said, ``because the act of selling investments was an act done in carrying out the investment business''.

The applicant also relied upon Memorex Pty Ltd v. FC of T 87 ATC 5034; (1987) 77 A.L.R. 299 and Federal Commissioner of Taxation v. GKN Kwikform Services Pty Ltd 91 ATC 4336; (1991) 21 ATR 1532. It went on to submit that if the vehicles here in question had been ``sold at a profit above that brought into account by section 59(2) there would be no doubt that the excess would be assessable under s. 25. The corollary must also be true i.e. that the excess loss is deductible under s. 51(1). And it would not be denied by the Commissioner but for section 57AF''.

A later passage in the written submissions read:

``In the case of an asset to which s. 57AF applies a deduction is not available under the depreciation provisions for the whole loss. But for a taxpayer having an appropriate business, such as a money- lender the excess of the loss not otherwise allowable is allowable as a deduction under s. 51(1). That that is so is a product of the particular business and the relationship of the assets to that business.''

In the course of final oral submissions for the applicant, its counsel agreed that, had the leasing transactions under consideration here been carried out as the sole business of a company other than a bank or a money-lender, the same taxation result would have followed if his general submissions were accepted.

In its written submissions the respondent pointed out that the leases plainly contemplated in fact ``the receipt by the applicant over the period of the lease of the rental payments provided for in the lease and then at the end of the lease disposal of the motor cars at their residual value. Such a transaction, if completed, clearly will not provide a loss for the Bank, because the total amount received by the Bank will be equivalent to repayment in full of the moneys outlaid by the Bank to purchase the motor cars plus interest at a predetermined rate''.

It went on to submit that ``the question is not: what is the Bank's true profit'' but ``are the claimed deductions allowable under section 51''. It cited the statement by Gibbs J in Nilsen Development Laboratories Pty Ltd & Ors v. FC of T 81 ATC 4031 at 4037-4038; (1980-1981) 144 CLR 616 at 628-630, and went on to point out that the applicant had not disputed that its rental receipts were fully income for tax purposes, whatever the position was with regard to its ``true'' economic profit.

The respondent submitted that if the parties dealt on the basis which the applicant had set out, they must accept the consequences, and that no loss is allowable under section 51(1) ``because depreciation has been allowed in respect of the whole of the item even though there may not have been a deduction in respect of the whole of the amount''. It disavowed any submission that sections 54 to 62 operate as an exclusive code but contended that ``the depreciation provisions have operated over the whole of the property''.

Counsel for the respondent further submitted that the suggested ``corollary'' argument set out in paragraphs 9 and 10 of the applicant's written submission (set out above) is unfounded. There are, as he pointed out, two separate questions:

1. if the respondent alleged that the applicant made a profit, did it in fact do so, and would that profit be taxable?
2. if the applicant claims to have made a loss, did it in fact do so, and if so, was it entitled to claim the benefit of it under section 51(1).

The answer to the first question does not determine the answer to the second, as the Act makes separate provisions dealing with them.

The respondent submitted that the basis of the applicant's claim seemed to involve at least two elements:

1. ``that by limiting the cost price available for depreciation on motor vehicles, section 57AF takes the non-depreciable portion of the purchase price out of the operation of the other provisions dealing with depreciation''.
2. that, ``independently of the depreciation provisions, a taxpayer (being a finance company) is entitled to a deduction for any

ATC 4276
loss on the disposal of its income-producing structure acquired for income producing by way of lease''.

The respondent submitted that, in any event, there was no loss suffered by the applicant, observing that:

``It has already been pointed out that the Bank's submissions acknowledge that the transactions contemplated by the Bank in entering into the leases, i.e. receipt of rent over the period of the leases and the disposal of the cars to the lessees at their residual value, produce together profits for the Bank, not losses (see Applicant's submissions para. 9). But the Bank wishes to say that the purchase and sale of the cars should be accounted for and taxed as discrete transactions separate from their leasing. If the cars were part of the Bank's trading stock, this would, no doubt, be correct - by reason of the trading stock provision of the Act; but they are not part of the Bank's trading stock. If the purchase/leasing/sale were in fact all separate transactions, it would also be correct. But here, as the Bank's submissions point out, what is involved is a `financing device'. The description of that device, in paragraph 2 of the Bank's submissions, by reference to the remarks of Priestley J.A. in Austin's case, necessarily involves the conclusion that disposal of the cars at residual value - something all along contemplated by the Bank as an integral part of the `device' - does not result in a loss to the Bank. This is for the simple reason that the whole device earns profits for the Bank, and it is accordingly incorrect to regard the final step in the device (the disposal of the cars) as involving a loss to the Bank merely because the sale takes place at less than cost price.''

In his final oral submissions counsel for the respondent referred to the applicant's Exhibit RNB 6A which became Exhibit 3 and was incorporated in the applicant's final written submissions, at p. 21D. It read:

`` TERMINATION OF A LUXURY MOTOR VEHICLE ASSET NO. 040-N2366

Upon termination of the lease, the primary and secondary assets recorded in COFAS are retired.

(A) SECTION 59 ADJUSTMENT

Page 110 of Exhibit `RNB3' (a copy of which is attached) records the retirement of the primary asset (asset number 040-N2366) and demonstrates the calculation of the section 59(1) income amount as follows:

        Consideration Receivable calculated in
                                    AB
        accordance with the formula -- in
                                     C
        section 59(6) where:

                            --------------

                                                                 $
A.  Consideration receivable in accordance with
    sub-section 59(3) ie sale price less expense of
    sale: see Exhibit `RNB5A' (sale price = $11,980,
    expense of sale = nil) not affected by s
    57AF(13), s 59(4) or s 59AA]                           11,980.00

B.  Motor Vehicle depreciation limit per s 57AF(6)         19,732.00

C.  Cost for purposes of calculation of depreciation
    of s 57AF had  not applied, s 57AF(13) -- not
    applicable in these matters.]                          29,000.00

                      A ($11,980) X B ($19,732)
    Consideration =   -------------------------          =  8,151.00
                            C ($29,000)

Calculation of Income Amount
----------------------------
s 62(1) Depreciated Value = s 57AF 'Cost' (being
primary asset cost of $19,732 less depreciation
claimed and allowed $14,836)                                4,896.00

Less: s 59(6) Consideration Receivable                      8,151.00
                                                            --------
s 59(2) Assessable Income                                   3,255.00
                                                            --------

(B) SECTION 51(1) LOSS

Page 345 of Exhibit `RNB4' (a copy of which is attached) records the retirement of

ATC 4277

the secondary asset (asset number 040-N2366-001) and the deduction claimed under sub-section 51(1) as follows:

Secondary Asset Capital Cost (no depreciation claimed
on this amount) (being $29,000.00 less s 57AF cost
limit of $19,732)                                           9,268.00

Less: Sale Proceeds as apportioned above ($11,980
less sub-section 59(6) amount of $8,151.00)                 3,829.00
                                                           -----------
Loss claimed under sub-section 51(1) of the Act            (5,439.00)"
                                                           -----------

Counsel for the respondent pointed out that the amount of $3255 was shown as assessable income, pursuant to the provisions of s. 59(2) and a loss was claimed under s. 51(1) in the amount of $5439, ``so that the same transaction in respect of the same amount of money produced, according to that analysis, a profit and a loss at the same minute in respect of the same sum''. He used this example to support his earlier written submission that:

``it cannot be the intention of the Act that a single undivided receipt arising from the disposal of a single asset should require at one and the same time the inclusion of an amount in assessable income because previously allowed deductions have to that extent been recouped by the receipt, and also the allowance of a deduction from assessable income because the receipt represents not only the gain to the taxpayer already referred to but also at the same time a loss to it. Yet this is what the Bank's submissions are openly acknowledged to involve. In the respondent's submission what this shows is that a luxury motor car should be treated as a single asset, its cost price should be treated as a single outgoing and its sale price should be treated as a single receipt, for these are the facts and the Act has not deemed it to be otherwise. When this is done it can easily be seen that the receipt of the sale price of such a vehicle may involve the receipt of income or it may involve the incurrence of a loss, but it cannot at one and the same time involve both. If this be so the reasoning on which the Bank's submissions rest must fail.''

Counsel described the applicant's submissions as being ``that the introduction of section 57AF has produced a situation where a section completely inoperable before in relation to these transactions, namely section 51, suddenly comes into effect, although there was absolutely no room for its operation before''. Having treated the luxury cars as capital assets for the purposes of depreciation, it was not open to the respondent to claim a loss in respect of their sale.

Before the introduction of section 57AF, the liability to tax of a taxpayer who leased a motor vehicle to a customer in circumstances such as those in the present case fell to be determined in accordance with the then existing depreciation provisions of the Act without reference to section 51(1).

The applicant submitted that after the introduction of section 57AF it was open to it to rely upon the provisions of section 51(1). It pointed out that section 57AF does not refer in terms to the operation of section 51(1).

The applicant acknowledged that the course which it followed in purchasing and leasing luxury motor vehicles has been widespread in commerce for many years. Accordingly, the legislature may be taken to have been aware of it. It conceded that if its suggested construction of the Act were adopted, only those engaged in the leasing field would benefit from it. Taxpayers who purchased their own luxury cars or acquired them by hire purchase would be limited to a claim under the depreciation sections.

If, on its true construction, section 57AF produced this differential treatment of taxpayers, then it must be given effect. However the section on its face, that is, without reference to any extrinsic material, reveals a policy designed to reduce the taxation advantages available by way of depreciation of luxury motor vehicles. Those advantages when section 57AF came into operation flowed from the depreciation sections of the Act, there being no occasion to seek to invoke section 51(1).

It would be strange indeed if the true construction of section 57AF were to be that the policy expressed in it were to be limited by the

ATC 4278

fact that s. 51(1) should, so far as the taxpayer and others in the leasing business, spring into action in aid of such taxpayers and so produce the result that there was one taxation result for them and a less favourable one for all taxpayers outside the leasing field.

It is true that section 57AF is silent in respect of section 51(1) but, in my opinion, that silence is better appreciated as silence in respect of a section (51(1)) which was regarded as having nothing to say in the circumstances.

In my opinion, the result for which the applicant contends would appear to run contrary to the general tenor of section 57AF and, for good measure, to benefit capriciously those in the leasing field, while still permitting the lessee to claim deductions in respect of his payments under the lease.

The submissions of the respondent on the construction of the Act and its application to the transactions here in question are well founded. In my opinion it was not open to the taxpayer to call in aid s. 51(1) as it sought to do.

Section 15AB of the Acts Interpretation Act 1901 provides as follows:

``15AB(1) Subject to sub-section (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material-

(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or

(b) to determine the meaning of the provision when-

(i) the provision is ambiguous or obscure; or

(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.

15AB(2) Without limiting the generality of sub-section (1), the material that may be considered in accordance with that sub- section in the interpretation of a provision of an Act includes:-

...

(e) any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted;

(f) the speech made to a House of the Parliament by a Minister on the occasion of the moving by that Minister of a motion that the Bill containing the provision be read a second time in that House;

...

15AB(3) In determining whether consideration should be given to any material in accordance with sub-section (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to-

(a) the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and

(b) the need to avoid prolonging legal or other proceedings without compensating advantage.''

I have not found it necessary to refer to extrinsic material in arriving at my opinion, but if it were necessary to do so, that opinion would be supported by reference to the terms of the explanatory memorandum set out in Schedule A and the Minister's speech set out in Schedule B to these reasons. Those documents show that it was contemplated that the provision would operate in respect of leased vehicles. They cannot assist in the construction of s. 51(1) but they can do so in determining whether s. 57AF had the effect of causing s. 51(1) to spring into operation.

The respondent contended that, in any event, the applicant made no loss on the leasing transactions. What it did was to fix the residual value at a figure which would not attract the hostile interest of the Commissioner and upon that basis to determine the rental payments by the use of a rate of interest apt to produce the

ATC 4279

planned profit on the transaction as a whole, when the rental had been received and the luxury motor car was sold to the lessee or another purchaser. In my opinion, that contention was sound and it is fatal to the applicant's submission that it suffered a ``loss'' determined by subtracting the residual payment from the purchase price.

Had it been necessary to do so, I would have accepted the respondent's submission in the further alternative that any loss suffered by the applicant would have been a loss of capital.

The Commissioner should bring in short minutes of orders to give effect to these reasons. The minutes should be delivered to my Associate and to the solicitors for the applicant within 7 days of the delivery of these reasons. The matter will be listed on a date and time to be notified to enable the parties to speak to the minutes.

Schedule A

``The purpose of sub-clause (1) of clause 9 is to insert a new section section 57AF - in the Principal Act which will limit to $18,000 for the year of income ending 30 June 1980 the cost for depreciation purposes (to be known as the motor vehicle depreciation limit) of a motor car or station wagon, including such a vehicle which is a four wheel drive vehicle, acquired by a taxpayer after 21 August 1979 and first used by the taxpayer during that year of income.

...

Sub-section (2) is the main operative provision in the new section. Where a taxpayer who owns a motor vehicle to which section 57AF applies would otherwise be entitled to depreciation allowances based on a cost in excess of the motor vehicle depreciation limit applicable to the year of income during which he first used it, whether for the purpose of producing assessable income or otherwise, the sub- section provides for that limit to be treated as being the cost of the vehicle for the purpose of calculating the depreciation allowable to the taxpayer for any year of income. The sub-section deems the cost of the vehicle to be the amount of the motor vehicle depreciation limit that applies in relation to the income year in which the vehicle is first used.

The motor vehicle depreciation limit will apply for the purpose of section 56(1)(b) of the Principal Act in calculating depreciation under the prime cost method. It will apply also for the purposes of section 62(1) of the Principal Act in calculating the `depreciated value' of property. The `depreciated value' of property is used in the calculation of depreciation under the diminishing value method of depreciation and for the purpose of calculating any balancing adjustments on disposal, loss or destruction of the property in accordance with section 59.

The limit will apply in relation to all cars and station wagons which are not excluded units of property' and in respect of which depreciation is allowable. It will thus apply to vehicles owned and let out on lease by finance companies or other lessors. Where finance companies use a financial or actuarial method of calculating the amount of taxable income - in which case an allowance for depreciation is reflected in the calculations - an appropriate adjustment will be made in calculating the taxable income of the finance company to reflect the depreciation cost limit that applies to the vehicles concerned.''

Schedule B

``Limitation of Value of Motor Cars for Depreciation and Leasing Purposes

Whilst the Government recognises that cars needed in many businesses and professions it does not believe there is any reason why the revenue should subsidise the full cost of expensive luxury vehicles used for such purposes.

The Government has decided to limit to $18,000 the amount which may be depreciated for income tax purposes for motor cars and station wagons (including four-wheel-drive vehicles, leased vehicles, and those used to provide services to the general public) ordered after tonight.

The excess of the price above $18,000 will not be depreciable and balancing adjustments on disposal will be calculated by reference to a deemed cost of $18,000.

The limit of $18,000 for depreciation purposes will be indexed annually.

ATC 4280

The gain to revenue from this proposal will be negligible in 1979-80 and $15 million in a full year.

I mention also that the Government is concerned that some lessees of cars and station wagons are, at the end of the lease, buying the vehicles for a price that enables them to profit by reselling the vehicles at their market value.

As the law now stands, the resulting profit may not be taxable, even though it effectively represents a recoupment of tax deductible lease charges.

Accordingly, the Government has decided to amend the law to ensure that any such profit is taxed on a basis corresponding with that applied where a person sells plant on which he has previously been allowed depreciation.

The amendment will apply in respect of all cars and station wagons that are purchased from lessors by the lessee or a relative or other associate after tonight.

The gain to revenue from this proposal will be negligible in 1979-80 but about $25 million in a full year.''

THE COURT ORDERS THAT:

1. the determination of the annuities issues in these proceedings should be stood over generally, its result will be governed by the final result, including any appeal, in relation to the same issue arising before the Full Court of the Federal Court of Australia in proceedings No. VG396 and No. VG397 of 1992;

2. the appeal be otherwise dismissed;

3. the respondent's costs of the appeal (including costs reserved) be paid by the applicant.

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