• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Malouf (NSD 674, 675 of 2008).

FC of T v MALOUF

Judges:
Sundberg J
Jessup J
Middleton J

Court:
Full Federal Court, Melbourne (heard in Sydney)

MEDIA NEUTRAL CITATION: [2009] FCAFC 44

Judgment date: 2 April 2009

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Sundberg, Jessup and Middleton JJ

Background

1. These are appeals from the judgment of the primary judge concerning the application of s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the Act") relating to a retirement village development and purchase of land contract ("the contract") entered into by the respondent taxpayer as purchaser on 25 June 1999. Upon entering the contract, the taxpayer paid a deposit and was required to pay on settlement, in a later income year, the balance of the purchase price in the sum of $33,250,000 ("the residue"). Under the terms of the contract, settlement was not to occur until the vendor to the contract had completed Stage 1 of the contracted development work and upon the vendor being in a position to deliver a transfer of land. The primary issue in the appeals is whether the residue payable on settlement was "incurred" at the time the contract was entered into by the taxpayer. If so, the residue was an outgoing incurred during the 1999 year of income.

2. The primary judge held that the legal obligation to pay the residue at settlement was incurred, and was referable to, the year in which the contract was entered into by the taxpayer. As a result, his Honour held that the taxpayer was entitled to the deduction in the 1999 year of income. It is this finding, and the construction of the contractual obligation, that is in dispute and the subject of the Commissioner's appeal.

3. There was no dispute between the parties as to the findings of fact made by the primary judge. The facts relevant to this appeal as found by his Honour, are that:

• • the scheme in which the taxpayer participated, and of which the contract was a critical part, was promoted to take advantage of Taxation Ruling TR94/24, in which the Commissioner stated that outgoings incurred on the purchase and development of land in connection with the development of a retirement village would be viewed as on a revenue account and would be deductible in the year in which the outgoings were incurred;

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  ATC 9557

  • the contract provided for (among other things) a deposit of $6,500,000, which was paid during the 1999 year of income, and payment of $33,250,000 on settlement if a retirement village was constructed in accordance with what was designated as Plans A. The residue was to be reduced by $6 million if the development was completed in accordance with what was designated as Plans B;
• • at the time the contract was entered into the land was vacant and had an agreed value of $2.5 million;
• • a town planning permit existed for the construction of buildings in accordance with what were described as Plans B. This permit was subject to 24 conditions, and was to expire on 8 October 1999;
• • no town planning permit had been obtained for the construction of the Plans A on which the contract price of $39,750,000 and the residue of $33,250,000 were based. No building contract had been entered into;
• • it was a term of the contract that the vendor would apply for a planning permit in accordance with Plans A;
• • on the settlement date the vendor was obliged, on payment of the residue, to deliver to the purchaser a registrable instrument of transfer and make the certificate of title available for registration;
• • the contract entitled the vendor to finance construction works on the security of the land;
• • the contract contemplated construction in three stages with payment of the residue on the settlement date which, subject to the provision of a transfer, would be 14 days after the Stage 1 Completion Date;
• • the scheme in which the taxpayer participated was required to be registered as a managed investment scheme, but was not registered and was ordered to be wound up on 17 February 2006. At this stage no significant work had been carried out; and
• • by a deed executed in February 2006 the purchaser and the vendor (and other parties) terminated the contract and the deposit was refunded together with interest.

4. Before the primary judge, the questions for determination were whether:

• (a) the residue payable under the contract was incurred in the 1999 year of income;
• (b) if incurred in the 1999 year of income, the outgoing was referable to that year or some other year or years of income; and
• (c) assuming the taxpayer to be wrong in relation to these substantive issues of "incurred", and "referable", a penalty should have been levied on him.

5. Section 8-1(1) of the Act provides as follows:

"You can deduct from your assessable income any loss or outgoing to the extent that:

• (a) it is incurred in gaining or producing your assessable income; or
• (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."

6. This section is, in all practicable terms, identical to s 51(1) of the Income Tax Act 1936 (Cth) ("1936 Act"), which has been the subject of interpretation by the relevant precedential authorities.

Consideration of the primary judge

7. The primary judge considered the authorities surrounding the interpretation of s 51(1) of the 1936 Act and s 8-1 of the Act to determine when an outgoing is "incurred". We set out in some detail the primary judge's consideration of these authorities because, in general, we agree with his Honour's analysis. However, it is his Honour's ultimate reliance on two Full Court decisions of this Court (to which we will return) in which we find the primary judge fell into error.

8.

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The primary judge (at [55]) considered that a useful starting point in determining when a loss or outgoing is incurred, is the summary set out by the Full Court in
City Link Melbourne Ltd v Commissioner of Taxation 2004 ATC 4945; (2004) 141 FCR 69 at 79-80 (adopted from the judgment of Hill J in
Ogilvy & Mather Pty Ltd v Commissioner of Taxation 90 ATC 4836; (1990) 21 ATR 841):

• • "It is unsafe to attempt an exhaustive definition of a term such as 'incurred': New Zealand Flax Investments Ltd at 297 per Dixon J;
  Hooker Rex Pty Ltd v Commissioner of Taxation (Cth) (1988) 19 ATR 1241 at 1249-1250;
• • In considering whether a loss or outgoing is incurred the Courts in Australia have adopted what is described as a 'legal' or 'jurisprudential approach' and not what may be described as a 'commercial approach':
  Coles Myer Finance Ltd v Commissioner of Taxation (Cth) [(1993) 176 CLR 640] at 662-663;
• • An outgoing may be incurred notwithstanding that the amount is not paid in the year of income:
  Commissioner of Taxation (Cth) v James Flood Pty Ltd (1953) 88 CLR 492 at 507;
• • An outgoing may be incurred notwithstanding that at the end of the year of income it represents a present liability then due although payable in the future:
  Commissioner of Taxation (Cth) v Australian Guarantee Corporation Ltd (1984) 2 FCR 483. However, it will be important that the liability is 'presently existing' during the year of income;
• • It will be necessary that the taxpayer has completely subjected itself to the loss or outgoing, that is to say definitively committed itself to it in the year of income:
  Merrill Lynch International (Australia) Ltd v Commissioner of Taxation (Cth) (2001) 113 FCR 79 per Lindgren J. It will not be sufficient if the loss or outgoing is no more than pending, threatened or expected, no matter that it may be certain that the loss or outgoing will occur in the future: Flood at 507-508; Hooker Rex at 1249-1250; and
• • However, a loss or outgoing may be incurred in the year of income notwithstanding that the obligation to pay it is theoretically defeasible: Flood at 506-507; Coles Myer at 670 or, perhaps, even contingent: Coles Myer at 670 per Deane J, citing Commercial Union Assurance Co of Australia Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 32 at 42-43, but see, however, Flood at 507-508."

9. In addition, Hill J in Ogilvy 21 ATR 841 also stated that (at 874):

"An outgoing not representing a pecuniary liability of the year of income will not be incurred, notwithstanding that it is certain that the outgoing will arise as a pecuniary liability in the future:
FCT v James Flood Pty Ltd, supra, and
Nilsen Development Laboratories Pty Ltd v FCT, supra."

10. The primary judge then continued his analysis as follows (at [56]-[58]):

"At about the time of this first instance judgment in Ogilvy & Mather 21 ATR 841, the Full Court in Raymor 24 FCR at 97 (Davies, Gummow and Hill JJ) expressed the relevant principles as follows:

'A loss or outgoing to be deductible under s 51(1) must be incurred in the year of income. What is meant by the word "incurred" in this context has been the subject of considerable discussion in the cases. Central to that discussion is the classic statement of Dixon J in
New Zealand Flax Investments Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 179 at 207, referred to with approval by the court in
Commissioner of Taxation (Cth) v James Flood Pty Ltd (1953) 88 CLR 492 at 507. His Honour there 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

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ATC 9559

more than impending, threatened or expected."

Some propositions are now well established. Outgoings may be incurred though the sum in question has not been paid or the liability discharged: New Zealand Flax Investments Ltd (supra) and James Flood Pty Ltd (supra). An outgoing may be incurred notwithstanding that it may be defeasible:
Commonwealth Aluminium Corp Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 210 at 223-224, cited with approval in
Commissioner of Taxation (Cth) v Australian Guarantee Corp Ltd (1984) 2 FCR 483, per Toohey J (at 487);
RACV Insurance Pty Ltd v Commissioner of Taxation (Cth) [1974] VR 1 and
Commercial Union Assurance Co of Australia Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 32. An outgoing may be incurred notwithstanding that the amount of that outgoing is payable in the future. It is not necessary that the outgoing be one both due and owing at the time it is "encountered": James Flood Pty Ltd at 507;
Commissioner of Taxation (Cth) v Australian Guarantee Corp Ltd (supra). However, "a liability which has not 'come home' in the year of income, in the sense of a pecuniary obligation which has become due" will not have been incurred until the year of income in which there is a presently existing liability:
Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) (1981) 144 CLR 616, per Barwick CJ (at 623) and per Gibbs J (at 627). As the Australian Guarantee Corp case demonstrates, evidence of commercial and accountancy practice may be relevant in determining whether an outgoing is referable to the accounting period in which it is claimed although such evidence will not be a substitute for the words of s 51(1) itself: per Toohey J (at 492-493), per McGregor J (at 501-503); see also
Hooker Rex Pty Ltd v Commissioner of Taxation (Cth) (1988) 79 ALR 181 at 189, 203. It may be noted that in the present case no evidence of this kind was adduced by the Commissioner.'

By and large this expression of principle is consistent with Ogilvy & Mather, though the propositions in the sixth bullet point in Ogilvy & Mather can be seen to be somewhat more qualified than as expounded in Raymor.

It is also important to bear in mind, as the Full Court said in Woolcombers 47 FCR at 575, that much depends on the circumstances of the case at hand. Whilst a legal or jurisprudential approach is to be taken, the precise circumstances of the contract and surrounding circumstances in question are what must be assessed, not generalities and wide categories of cases."

11. The primary judge then continued by analysing the High Court decision in
Federal Commissioner of Taxation v Citylink Melbourne Ltd 2006 ATC 4404; (2006) 228 CLR 1, particularly the reasons of Crennan J (with which Gleeson CJ, Gummow, Callinan and Heydon JJ agreed). The primary judge in particular referred to the following passage of Deane J's reasons in
Coles Myer Finance Ltd v Federal Commissioner of Taxation 93 ATC 4341; (1993) 176 CLR 640 at 670 as adopted by Crennan J:

"[T]he weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a "loss or outgoing" which is "incurred" within the meaning of that sub-section notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled." (Footnotes omitted.)

12. Reference was then made by the primary judge to the comments of Crennan J in Citylink 228 CLR 1 where her Honour said (at 37-8):

"Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future. His Honour recognised that on some facts it would be apparent that a condition giving rise to a

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ATC 9560

theoretical contingency could be treated, for practical purposes, as certain to be satisfied." (Footnotes omitted.)

13. The primary judge had already noted that it was 'the legal character of the outgoing [that] must be the subject of focus' (at [41]), citing Coles Myer 176 CLR 640. His Honour focussed on special condition 11 of the contract which contained the express promise to pay the residue on the settlement date, being some 14 days after the Stage 1 Completion Date (at [42]). His Honour noted that the obligation to pay the purchase price under an executory contract, 'subject to a revealed contrary intention … accrues fully only on settlement' (at [44]). Thus, citing a number of authorities, his Honour was of the view that there was (at [45]):

• • no "debt" arising from the promise to pay the residual purchase price under an executory contract on settlement (referring to
  McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 475-6 per Dixon J); and
• • no "accrued liability" for a purchaser to make the payment until completion (referring to
  Sunbird Plaza Pty Limited v Maloney (1988) 166 CLR 245 at 254 per Mason CJ).

14. The primary judge referred to
Gasparin v Commissioners of Taxation 94 ATC 4280; (1994) 50 FCR 73. His Honour said (at [48]):

"Gasparin and the cases referred to therein are not determinative of the question as to what "incurred" means for the purposes of 8-1 of the 1997 Act. They do reveal, however, the use, in a cognate area, of the distinction between a promise in an executory contract, and the debt (that is the present obligation to pay the purchase money) accruing on settlement, whether payable then or after some agreed time if credit be given. In this context, it is important to note that von Doussa J, though dealing with the contract for the sale of land, referred to Automatic Fire Sprinklers 72 CLR 435. That case concerned a question of wrongful dismissal under wartime regulations. Nevertheless, despite this context, what was said by Dixon J at 463-464 remains important for understanding the relationship between the executory contract and the entitlement to the price of the property or services contracted for:

'In certain forms of executory contract where the promise of one party is to pay the other money in consideration of his transferring property, of his doing work, of his serving the former as his master, and, perhaps, of his providing other tangible things or definite services, the money to be paid is regarded as the price of or reward for the property or service when and so often as the transfer of the one or the performance of the other affords an executed consideration. In these contracts the promise to pay the price or reward is not construed as a simple obligation to pay a sum or sums at a future date supported solely by a consideration consisting in the corresponding promise to transfer the property, do the work, serve, or provide the things or services by the other party, so that a mere readiness and willingness on the one side of the latter to perform his part is enough to entitle him to the payments, notwithstanding that, whether owing to the fault of the former, or without fault on either side, the property is not transferred, the work is not done, the relation of master and servant ceases, or the things or services are not provided. The most familiar example is that of the sale of goods. There the common understanding of an agreement to sell is that it is the goods and not the promises to deliver that are to be paid for. The result is that, if the seller tenders goods in accordance with his contract but the buyer rejects them in breach of his contract, the seller cannot sue for the price; his remedy is for unliquidated damages for non-acceptance. …' "

15. Then, in construing the nature of the taxpayer's obligation under the contract, his Honour said (at [50]):

"… there was nothing qualified or inchoate about the promise in special condition 11 of the contract. There was no condition precedent to the coming into existence of the promise there stated. It was, from exchange

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ATC 9561

of contracts, a legal obligation intended to have effect; but it is to be construed (as its words make plain) as an obligation to pay a certain time after tender of the transfer on settlement. After the contract was made, it was a promise that was part of an executory contract, but, of course, it could not be withdrawn. The point of the above authorities is that until delivery (here, of the transfer) there is no accrued obligation to pay, no debt. What exists beforehand is a promise to pay, but in one sense dependent or conditional upon delivery. …" (Emphasis added.)

16. Subject to one qualification, and to an examination of certain authorities, his Honour found "significant force" in the Commissioner's submission that "the conditionality of settlement was more than theoretical, involving practical considerations that were far from certain" and which "was not due or accrued and would not be so until settlement and the delivery of a transfer and title to the land" (at [62]-[63]). That one qualification was that the authorities do not compel a detailed assessment of the likelihood of the contingency occurring.

17. His Honour continued (at [65]):

"That said, the words of Barwick CJ in Nilsen Development 144 CLR at 623-624 using the phrase of Latham CJ in Emu Bay Railway Co 71 CLR at 606, applied by Crennan J in CityLink 228 CLR 1 that the liability must be "presently incurred and due" in the context of the liability to pay the purchase moneys for the acquisition of land are a powerful basis to conclude that the outgoing (being the payment of the purchase moneys) has not been incurred at exchange and will not be incurred until settlement. To apply McDonald v Dennys Lascelles, Automatic Fire Sprinklers, Sunbird Plaza and Gasparin, a distinction could be made between the promise to pay the purchase price as part of an executory contract and the liability to pay the purchase price which accrues, and can be seen to be due, only at settlement. Thus, it could be said that the liability to pay the outgoing is not 'incurred and due'; just as the income for the seller is not derived: Gasparin 50 FCR 73."

18. However, his Honour felt constrained by two Full Federal Court authorities to then follow a different path. The two authorities are
Commissioner of Taxation v Raymor (NSW) Pty Limited 90 ATC 4461; (1990) 24 FCR 90 ("Raymor") and
Commissioner of Taxation v Woolcombers (WA) Pty Limited 93 ATC 4342; (1993) 47 FCR 561 ("Woolcombers"). We examine these cases in detail at [28] to [47]. His Honour derived from them the proposition that the entry into an obligation to pay for future goods is sufficient for there to be the incurring of a liability to pay for them, even if the obligation is defeasible: see [69] and [76]. His Honour said (at [77]):

"As I have said earlier, the application of the principles in Sunbird Plaza to the question of "incurred" has force, unconstrained by authority. So to conclude would lead to a certain harmony in timing between recognition of derivation of income and the incurring of an outgoing. It would give expression to the long-recognised underlying legal analysis in cases such as McDonald v Dennys Lascelles, Automatic Fire Sprinklers, and Sunbird Plaza. It would conform more clearly with the views of Barwick CJ in Nilsen Developments 144 CLR 616. Nevertheless as a single judge, I am clearly bound by Raymor and Woolcombers. The essence of the argument, as I apprehend it, that was put to the Full Court in Woolcombers, was put to me, though, perhaps, in a somewhat more developed form. Unless the last passage that I have quoted above entitles me to find differently, on the authority of both Raymor and Woolcombers, I should find that the obligation to pay the purchase price on settlement was incurred at the time of the exchange of contracts."

19. The last passage his Honour referred to and quoted was in Woolcombers at 575:

"In our view, much will depend upon the particular circumstances of the case at hand. If the defeasibility takes the form of a contingency such as drought or a similar frustrating event which ordinarily would be implied as a matter of business efficacy, it is difficult to argue that by reason of the

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ATC 9562

existence of this contingency, no liability to pay the price has accrued."

20. His Honour then said by reference to the facts in Woolcombers that (at [78]):

"I do not think that the defeasibility of contingency of drought, flood or disease in Western Australian sheep country in the late 1980s should be viewed qualitatively differently from commercial building in Victoria in the late 1990s. Both undertakings have their risks and imponderables, and it is clear that natural or commercial exigencies may intrude to defeat or delay the future event upon which payment would be made. Importantly for present purposes, the obligation on the vendor to undertake the building work to a point of completion at which settlement would take place was unconditional. If building work could not be completed to a stage for completion that would be a product of either force majeure or frustration or default. There was no allegation of sham. Whilst the contract can be said to have been made available with its tax advantages made prominent, it was a real commercial undertaking. The obligations of the vendor were, amongst other things, to bring the project to Stage 1 completion under a permit based either on Plans A (a new permit) or Plans B (the existing permit). The purchaser was obliged to pay the residue on settlement."

21. Based on the proposition he derived from Raymor and Woolcombers (see [18]), the primary judge considered himself bound to conclude that the liability to pay the residue on settlement was incurred at the time of entering into the contract and was in fact referable to the 1999 year of income. In other words, the obligation to pay the residue in the future had "come home" in the 1999 year of income (at [32]).

Submissions

22. Before us the taxpayer submitted that there is no need for an outgoing to be construed as a debt or pecuniary liability before it can be said that a taxpayer has definitively committed itself to the liability. Reliance was placed on the primary judge's finding (referred to above at [20]) that natural or commercial exigencies, in the context of a real commercial undertaking, did not mean that the taxpayer was not definitively committed to the payment at the time of entering into the contract. The taxpayer pressed in his submissions that the notion of a presently existing debt is simply not critical in this area of tax law as regards deductibility of the liability incurred.

23. The taxpayer argued that this Court should follow Raymor and Woolcombers, and went on to submit that each of these cases involved contracts materially indistinguishable from the contract before us: a purchaser (of plumbing supplies in the former, of wool to be grown in the future in the latter) undertaking to pay for items to be delivered in the future at an agreed price, subject to adjustments, and subject to the condition subsequent that if the supplier did not perform his side of the bargain, there would be no obligation to make a payment. That is to say the obligation would defease to the extent the condition was not satisfied and the purchaser could elect, in such circumstances, to bring the contractual arrangements to an end.

24. In the Commissioner's submission, the primary judge correctly distilled the authorities, including the requirement that for an outgoing to be incurred it must be construed as a debt or pecuniary liability in the income year in which it is deducted. It was contended that for an outgoing that has not been paid to be incurred under s 8-1 of the Act the event that crystallizes liability or the coming into existence of the debt must have occurred, relying on
Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) 81 ATC 4031; (1981) 144 CLR 616 at 623 per Barwick CJ and 627 per Gibbs J;
Emu Bay Railway Co v Commissioner of Taxation (1944) 71 CLR 596 at 606 per Latham CJ; Coles Myer 176 CLR 640 at 662; and
Layala Enterprises Pty Ltd (In Liq) v Commissioner of Taxation 98 ATC 4858; (1998) 86 FCR 348 at 364.

25. It was submitted by the Commissioner that a consistent line of authority in this Court and the High Court requires in the first place a jurisprudential analysis of the contractual rights and obligations of the taxpayer who claims to have incurred an amount which has not been paid. It is only if the analysis discloses a debt or pecuniary liability, albeit one payable in the

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future, that it can be said than an amount is incurred under s 8-1 of the Act.

26. The Commissioner submitted that the legal effect of the contract was that it remained executory until settlement when a transfer would be tendered. Subject to a specific provision where "the price is expressed to be payable on a fixed day, not being the day fixed for completion" (referring to Sunbird Plaza 166 CLR 245 at 253), the accepted legal principle is that under such a contract there is no liability or debt due to the vendor until settlement when the transfer is tendered: referring to McDonald 48 CLR 457 at 475-6; Sunbird Plaza at 253-4 and 267-8; Gasparin 50 FCR 73 at 77. This principle is not limited to executory contracts for the sale of land: see
Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 at 464 per Dixon J. Accordingly there was not, during the 1999 year of income, a debt or pecuniary liability due by the taxpayer for the residue of the purchase price, and not even one payable in the future.

Consideration

27. We have already indicated that we generally agree with the primary judge's analysis of the relevant authorities, although not with his Honour's view that the analysis in Raymor and Woolcombers dictated that the obligation to pay the residue under the contract was incurred in the 1999 year of income. It is therefore important to consider these two Full Court authorities.

Raymor

28. The first decision that his Honour felt bound to apply was Raymor, which considered the deductability of outgoings incurred in an income year under s 51(1) of the 1936 Act. In Raymor the taxpayer had entered into a series of supply agreements to purchase copper tubing. Each agreement allowed the taxpayer to nominate the delivery date for the copper tubing, while the quality and quantity of the product was predetermined. The agreements allowed for price variations with the rise and fall in the Australian copper price, such that the final price might be adjusted at the date of delivery. Payments under the June 1984 and the June 1985 agreements were made at the time of execution of each agreement. The taxpayer claimed deductions for these amounts, even though delivery transpired at a time outside the claimed income year. The Full Court held that when the taxpayer bound itself to pay the purchase price, even though it was at that time undetermined, it incurred that amount as an outgoing and it was thus referable to the claimed income year.

29. Nothing in the contract made either delivery of the goods nor payment of the consideration conditional on any given event. Rather, delivery was discretionary on the basis of timing and location; the cause for delivery had already been secured by the payment of consideration on the date of execution, on 29 June 1984 and 27 June 1985 respectively.

30. The Court did consider the circumstances in which an outgoing was incurred notwithstanding that the amount of the outgoing was payable in the future. In doing so it said (at 97):

"However, 'a liability which has not "come home" in the year of income, in the sense of pecuniary obligation which has become due' will not have been incurred until the year of income in which there is a presently existing liability."

31. The Court cited Nilsen 144 CLR 616 for the above proposition. Clause 7 of the contract in Raymor provided for payment on execution of the agreement, not upon delivery (at 93), expressing a contrary intention to the general position as expressed in Automatic Fire Sprinklers 72 CLR 435. The position under the contract in Raymor was that a debt for the undelivered goods arose on execution of the contract and was thereupon discharged (at 97-98).

32. Unlike the present case, in Raymor the obligation to deliver under the copper tubing purchase agreements was fixed at the time of entering into the agreements, and the obligation to pay the consideration was immediately discharged. As the Full Court stated in Raymor (at 97):

"It follows, therefore, that at the point of time at which the [taxpayer] bound itself as a party to each of the contracts, and so became committed to pay the amount shown in each contract … it incurred the respective amount, notwithstanding that its obligation could be increased or reduced under the rise and

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fall provisions of the contract: cl. 8. Payment thereafter was strictly irrelevant to the time at which the outgoing was incurred. It merely operated to discharge in the year of income the outgoing already incurred in that year. In this sense it is strictly incorrect to speak of the payment here in question as a prepayment. A presently existing obligation had arisen and had been discharged."

33. The nature of payment and delivery in Raymor bears no similarity to the terms of the contract before us. The principles of law expressed by the Full Court in Raymor are consistent with the principles of law adopted by the primary judge throughout his Honour's judgment. Because the terms of the arrangements in Raymor are materially different from those of the contract, we consider that his Honour fell into error in adopting the result in Raymor to the situation before him.

Woolcombers

34. As we have said, the taxpayer also relied on Woolcombers to support its contention that the future payment of the residue was deductible in the 1999 year of income.

35. The terms of the arrangements in Woolcombers have a closer resemblance to the contract the subject of this appeal than the arrangements in Raymor. Woolcombers was a wool trader that had entered into forward contracts to purchase wool from woolgrowers. For the majority of the forward contracts the price of the wool was fixed, while a number of contracts allowed for price variation. In the 1988 income year Woolcombers claimed as a deduction the estimated payment under the forward contracts entered into the 1988 income year. The Commissioner refused to allow the deduction, and the taxpayer was successful at first instance.

36. In the Full Court, the standard term forward contract was considered, and the following relevant terms were noted:

• • at the time of signing the contract Woolcombers agreed to purchase the wool shorn or to be shorn;
• • property in the wool would pass to Woolcombers upon payment to the seller; and
• • payment would be made after the date of completion of delivery.

During the relevant income years, all but one forward contract was fulfilled. In the 1988 financial year, Woolcombers claimed a deduction under s 51(1) of the 1936 Act for the estimated payment under forward contracts entered into that year. The first instance judge and the Full Court both held that the outgoing was incurred and referable to the 1988 income year.

37. The Commissioner argued, inter alia, that the liability was not referable to the income year claimed as it was not a presently existing pecuniary liability (at 568):

"In each contract, the delivery of the wool was said to be a condition precedent to the performance of Woolcombers' obligation to make payment under the contract. No present liability to make a payment would accrue until after the wool was delivered. That event did not occur in the year of income. And even if during the year of income, Woolcombers had incurred a liability to pay for the wool, that liability did not become a present liability, or an accrued obligation, until the wool was delivered and payment became due."

38. Woolcombers countered that (at 569):

"Accordingly, at that time a present liability had arisen. Delivery of the wool was not a condition precedent to the liability to pay. It was a condition precedent to performance by Woolcombers of its obligation:
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537."

39. The Full Court subsequently held that Woolcomber's view was to be preferred. In discussing the nature of when an expenditure was incurred, the Full Court said (at 570):

"It is not necessary that 'an actual disbursement' should have taken place. Although it is not enough if there is 'no debitum in praesenti solvendum in futuro … [or] an inchoate liability in process of accrual but subject to a variety of contingencies' (
Commissioner of Taxation (Cth) v James Flood Pty Ltd (supra) per Dixon CJ, Webb, Fullager, Kitto and Taylor JJ at 507-508)."

40. The Full Court was of the view that there was an accrued obligation or present liability imposed by a definite contractual commitment.

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It noted that 'the relevant inquiry [was] with respect to the character of Woolcombers' liability to pay the price rather than the nature of its interest, if any, in the wool' at the time of entering the contract (at 574).

41. In response to the Commissioner's submission that because the delivery of the wool was a condition precedent to payment by Woolcombers, no present liability to make a payment accrued until after delivery, the Full Court distinguished the decision in
Ogilvy & Mather 21 ATR 841. Noting that in that case the taxpayer was an advertising agency, the Full Court said (at 574):

"Under the Media Council rules, it 'guaranteed' its client's advertising costs. A claim was made to deduct the price of advertising orders whose non-cancellation period commenced before the end of the year of income, but publication of which occurred after the end of that year of income. The claim was disallowed because, on the true construction of the rules, unless and until publication occurred, the agent was not liable.

As Toohey J pointed out in Australian Guarantee (supra) at 487-488, it is a question of construction of the instrument in hand whether it does, or does not, given rise to a present liability notwithstanding that the time for payment has not arisen. In our opinion, the analysis of liability of the agent made in Ogilvy & Mather depended upon the exact terms of that relationship; it cannot govern the circumstances of the present case." (Emphasis in original.)

42. The Full Court concluded (at 575):

"In our view, much will depend upon the particular circumstances of the case at hand. If the defeasibility takes the form of a contingency such as a drought or a similar frustrating event which ordinarily would be implied as a matter of business efficacy, it is difficult to argue that by reason of the existence of this contingency, no liability to pay the price has accrued."

43. The legal principles enunciated in the decisions in Woolcombers (both at first instance and on appeal) are consistent with the principle that there must be an accrued pecuniary liability before an amount can be said to be incurred. At first instance Lee J held that '[t]here was an accrued obligation or present liability imposed on the taxpayer by a definite contractual commitment':
Woolcombers (WA) Pty Ltd v Commissioner of Taxation 93 ATC 4342; (1993) 25 ATR 487 at 494. His Honour therefore concluded that there was a present liability, albeit payable in the future. The Full Court agreed with that conclusion. If the Full Court in Woolcombers had concluded that there was no such present liability it would have held that the amount was not incurred.

44. The conclusion of the Full Court that '[d]elivery of the wool was not a condition precedent to liability to pay' can be reconciled with the statement of Dixon J in Automatic Fire Sprinklers 72 CLR 435, 464 that 'until [the goods] are accepted there is no indebtedness' on the basis that both conclusions were reached only after an analysis of the intentions of the parties to the respective contractual arrangements.

45. Undoubtedly, the contract terms considered in Woolcombers are of a similar nature to those before us in this appeal. Nevertheless, as was emphasised by the Full Court in Woolcombers, much will depend 'upon the true interpretation of the particular language of the contract' (at 575). Much will also depend upon the nature of the contractual arrangements. This involves looking at the circumstances of each case. Woolcombers recognises, as do the other authorities referred to by the primary judge, one guiding principle. Every contract must be construed according to the intention of the parties, and upon taking a legal or jurisprudential approach, the contractual arrangements and surrounding circumstances must be considered in determining when the loss or outgoing has been incurred.

46. In Woolcombers 25 ATR 487, Lee J (as accepted by the Full Court) found in the circumstances of the agreement before him a mutual intention that the taxpayer obtain enforceable contractual rights upon execution of the agreement and would undertake a commensurate liability (at 494). In part this was because there was a liability on the woolgrower to indemnify the taxpayer upon formation of the

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ATC 9566

agreement which made it clear that it was intended that a correlative liability be imposed on the taxpayer at the same time to pay the woolgrower.

47. The agreement in Woolcombers concerned an existing and identifiable subject matter, namely wool on the sheep. This was the subject matter of the agreement to sell. For delivery to occur steps customarily taken in the trade were required to be completed. Absent some event of frustration (such as bushfire, plague etc) the sheep would be shorn and delivery of the wool would take place. In the circumstances, the Full Court treated the agreement as unconditional, subject to defeasance (see Woolcombers at 575 [E]-[F]). The only real basis for defeasance being an event which would give rise to frustration of the agreement and prevent delivery.

48. Looking then to the contract before us in the appeal, the obligations of the vendor were to bring the development to Stage 1 completion. The taxpayer was then obliged to pay the residue on settlement. The major portion of the value which the taxpayer obtained under the contract related to a development which did not exist at the time the contract was entered into by the parties. Not even the preferred planning permit was in existence which would give rise to the increased value of the land by reason of any development. The contract was not an unconditional agreement subject to defeasance by unforeseen events. The taxpayer's obligation to pay under the contract was dependent upon further performance by the vendor, and upon the happening of events which were anticipated but were under the control of neither party.

49. The fact is that with the executory contract before the primary judge, the liability to pay was not due until settlement and delivery of a transfer and title to the land. The focus of the contract so far as imposing an obligation on the taxpayer was to pay at settlement. The nature of the contract, involving the sale of land, whilst not decisive, is of relevance in applying established and well recognised legal and jurisprudential principles to the operation of the contract, as recognised by the primary judge.

50. The passages referred to above of Deane J in Coles Myer 176 CLR 640 (and adopted by Crennan J in Citylink 228 CLR 1) do not suggest any different analysis. The pecuniary liability must be actually incurred. It then may not matter that the amount is not payable until some future time, or may be defeasible or contingent. By operation of the contract in this appeal, the pecuniary liability was not incurred at the time of entering into the contract, but would only be incurred upon settlement.

51. Therefore, in our view the decision in Woolcombers is distinguishable for the reasons set out above and does not dictate the result found by the primary judge.

52. Each of Woolcombers and Raymor was decided according to the factual circumstances and the contractual arrangements before the Court. As we have indicated, both cases are distinguishable. His Honour was entitled to find, and should have found, differently, from the conclusions reached by the Full Courts in Raymor and Woolcombers.

Conclusion

53. In our view, there was no pecuniary liability incurred by the taxpayer in the 1999 year of income.

54. On the above analysis, the obligation to pay the residue was not referable to the 1999 year of income. We do not need to consider the alternative submission of the Commissioner that the residue was not an amount which, given the voidable nature of the contract or the contingencies surrounding it, the taxpayer was definitely committed to pay in the 1999 year of income.

55. Further, no question of penalty arises on the appeals as the Commissioner does not seek the imposition of any penalties.

56. Accordingly, we propose to allow each appeal.

57. We also propose to give the parties the opportunity to file and serve any necessary or appropriate further orders other than those pronounced (including as to the costs of the appeal). We observe that no order for costs was necessary before the trial judge as the proceeding had test case funding.