Nilsen Development Laboratories Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Murphy J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 31 July 1978.

Murphy J.: This was an appeal by the taxpayer company against the disallowance by the Commissioner of two claims for deductions from its assessable income made under sec. 51(1) of the Income Tax Assessment Act 1936 as amended (hereinafter termed ``the Act''). The first claim for a deduction related to a provision made in the accounts of the taxpayer for a sum equal to the amount asserted to be presently owed at 30 June 1974, by way of Long Service Leave to two employees of the taxpayer who had served for over fifteen years with it. The second claim for a deduction related to a provision made in the accounts for a sum equal to the amount asserted to be presently owed at 30 June 1974 by way of Annual Leave,

All the relevant employees were employed from week to week.

The facts were not the subject of agreement between the parties. There were no pleadings, and prior to the hearing no issues were defined by the parties.

Evidence was called by the appellant only and on that evidence I find the following facts.

Nilsen Development Laboratories Pty. Ltd. (hereinafter referred to as ``the taxpayer'') was incorporated in 1968 and immediately Oliver J. Nilsen & Co. Pty. Ltd. ``transmitted'' to the taxpayer so much of its business as involved research into and development of electrical engineering processes. At the same time most of the taxpayer's present employees were transmitted to it from Oliver J. Nilsen & Co. Pty. Ltd. No details of the circumstances leading to the transmission of the business or

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of the financial arrangements then made between the taxpayer and Oliver J. Nilsen & Co. Pty. Ltd. have been placed before me.

In the year ending the 30th June 1974, the taxpayer, when forwarding its income tax return to the Deputy Commissioner of Taxation in Victoria, included in its statement of taxable income a deduction of $1,732 which it described as ``Holiday Pay Legal Liability as (at) 30.6.74 less 17½% loading'' and a further deduction of $6,359 described as ``Long Service Leave Legal Liability as (at) 30.6.1974 per schedule''.

It also attached to this return a statement explaining its reason for making the claims for deductions for Long Service Leave and Holiday Pay, and the way that it had made up its accounts and its statement of taxable income. (See Folios 5 and 8, Exhibit J.)

Prior to the year ending 30th June 1974, in lodging its income tax return the taxpayer had been in the habit of adjusting the profit shown in its published accounts for commercial purposes, by adding back the amount set out in those accounts as a provision against its liability to pay Long Service Leave. It did this because it was of the ``understanding'' that the Commissioner refused to allow any deduction to be made from assessable income based on any provision for Long Service Leave or Annual Leave.

Mr. Liddell for the Commissioner stated that this ``understanding'' of the taxpayer was correct. The Commissioner did not and does not allow any such deductions.

Oliver J. Nilsen & Co. Pty. Ltd. had not, when lodging its income tax returns over the years prior to transmitting its business and employees to the taxpayer in 1968, claimed, or if it did claim (which does not appear), it was not allowed as a deduction from its assessable income, the pay equivalent of the Long Service Leave to which the two employees in question, Messrs. Auty and Aughton, became entitled from time to time, or the pay equivalent of the Annual Leave to which its employees as a whole were then entitled.

There is no direct evidence as to the entitlement (if any) of any employees to Long Service Leave or Annual Leave on their transmission to the taxpayer in 1968.

In 1974, on receiving the taxpayer's return, the Deputy Commissioner adjusted the taxable income of the taxpayer by reducing the nett loss as returned, namely $1,130, by adding to it the sum of the provisions relating to Holiday Pay and Long Service Leave (namely $8,091), thus arriving at a taxable income of $6,981. (Folio 10, Exhibit J.)

On the 23rd October 1975 the taxpayer gave Notice of Objection against Assessment (Folios 11-13, Exhibit J) setting out some 14 ``grounds'' therein.

The objection was disallowed by the Commissioner and in accordance with sec. 187 of the said Act the taxpayer requested that the objection be treated as an appeal to this Court.

Before me, Mr. A. Webb, one of Her Majesty's Counsel, and with him Mr. Forsyth of Counsel, appeared for the taxpayer, and Mr. Liddell, one of Her Majesty's Counsel, and with him Mr. Myers of Counsel, appeared for the Commissioner.

At the outset, two other appeals raising in principle the same issues that arise in this appeal were called for hearing along with this matter, but, by agreement, these other appeals were deferred by me to await the outcome of this appeal. During the hearing of this appeal, an additional objection relating to ``work in progress'' which had been raised by one of the other taxpayers, Nilsen Porcelains (Australia) Pty. Ltd., in its appeal (Tax Case No. 56 of 1976), was expressly abandoned by Mr. Webb.

Further, it became apparent during the hearing of this appeal by the taxpayer that the figures set out in the accounts contained in Folio 8 (Exhibit J), were incorrect and that the figures in a further summary tendered in evidence as Exhibit ``A'' were also misleading.

Counsel on both sides then agreed that the determination of the precise figures which were applicable on the facts of the instant case should be left until the matters of principle which clearly arose, (whatever the exact figures might be), had been determined, and that if the parties then were unable to agree the figures, the court could decide the same on hearing further evidence to be presented before it. It seems to me to be vital that, if appeals are to be brought before

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this court on taxation matters, some pre-trial procedure ought to be laid down and followed, in order to define the ``relevant issues'' and to ascertain what matters are in dispute before the hearing.

The appeal was argued before me on the basis that the evidence established that two of the taxpayer's employees, namely Messrs. Auty and Aughton, (hereinafter termed ``the said employees''), had commenced their employment with Oliver J. Nilsen & Co. Pty. Ltd. in December 1938 and February 1942 respectively. They remained in the continuous service of Oliver J. Nilsen & Co. Pty. Ltd. until they were transmitted, along with the business, to the taxpayer in 1968. They had, on transmission, served thirty years and twenty-six years respectively in continuous service with Oliver J. Nilsen & Co. Pty. Ltd.

By the 30th June 1973, they had continuously served, in the employ of Oliver J. Nilsen & Co. Pty. Ltd. and of the taxpayer, over thirty-four years and thirty-one years respectively.

On the 30th June 1973 the said employees were respectively entitled to something in the region of twelve and nineteen weeks Long Service Leave (see Exhibit I). Each had been granted and taken some Long Service Leave during their periods of continuous service but exactly when this leave was taken is not made clear.

By the 20th June 1974, each of the said employees had received an increase in his ordinary rate of pay above that applicable on 30th June 1973, and they had continued in the service of the taxpayer without taking any further Long Service Leave between 30th June 1973 and 30th June 1974.

During 1974, the taxpayer received legal advice which led it to believe that it was entitled to claim as a deduction from assessable income under sec. 51(1) of the Act the amount which it would have to pay the said employees on account of Long Service Leave, and also the amounts due to a number of other employees, (including two who had not been employed in 12 months continuous service), on account of Annual Leave.

As I have said, these amounts were then claimed in the taxpayer's 1974 return as deductions under sec. 51(1) of the Act, but both claims were disallowed.

A document entitled ``Metal Trades Industry Award 1971 as varied to April 1, 1976, printed privately by Metal Trades Industry Association of Australia'' was tendered before me and became part of Exhibit ``C''.

It set out the Metal Industry Award 1971, (Part 1) which contained provisions relating to Annual Leave (see page 59).

It also contained, at its back, the Metal Trades (Long Service Leave) Award, 1964.

Following questions that I directed to Counsel, (and after what I consider to have been the waste of a good deal of time), it was finally agreed that the said document forming part of the said Exhibit ``C'', (apart from certain insignificant amendments and typographical errors, see the typed pages attached to and forming part of Exhibit ``C'') was, insofar as relevant, a true copy of the said Awards (as published in the Commonwealth Arbitration Reports), in the form in which these awards were both at 30th June 1973 and 30th June 1974.

During the hearing, Counsel on both sides referred from time to time to the Labour and Industry Act 1958 (Vic.) and to the Labour and Industry (Annual Holidays) Order 1967. (Victoria Government Gazette No. 23 dated 15th March 1967) (Exhibit H).

It was common ground that the relevant employees of the taxpayer were members of a union which was a party to the Metal Industry Award 1971 and to The Metal Trades (Long Service Leave) Award 1964, (hereinafter referred to as ``the said Awards'') and that the taxpayer was also a party to the said Awards.

I have considered the terms of the said Awards, and also the provisions of sec. 142-164 (inclusive) of the Labour and Industry Act 1958 (Vic.) and the said order.

Having regard to sec. 65 of the Conciliation and Arbitration Act 1904 (as inserted by sec. 7 of Act No. 44 of 1956) I am satisfied that both Annual Leave and Long Service Leave are matters dealt with in the said Awards, and that the provisions of the said Victorian Act and Order with relation to these matters are invalid, insofar as they purport to apply to the relevant employees

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and the taxpayer in this appeal. See also
Clyde Engineering Company Limited v. Cowburn (1926) 37 C.L.R. 466.

The issues that arise here call for a consideration of the said Awards, and in my opinion the provisions of the Victorian legislation are irrelevant, except insofar as they are, by reference, necessarily incorporated in the said Awards (for example, see cl. 6(4) Metal Trades (Long Service Leave) Award 1964). Counsel for the Commissioner expressly stated that despite sec. 190 of the Act, no point was made of the fact that, in the taxpayer's Notice of Objection, it relied only on the provisions of the Labour and Industry Act 1958 (Vic.).

In order to isolate the issues that arise in the appeal, it is necessary to look at the claims as made by the taxpayer, and also at the terms of the said Awards.

There are two subject matters of the taxpayer's claims for a deduction under sec. 51(1) of the Act, namely Long Service Leave and Annual Leave. They must be considered separately. They are each dealt with in different terms in separate Awards. Different considerations apply in deciding whether, on the facts established, a provision made in the taxpayer's accounts relating to each of them is a loss or outgoing incurred in gaining or producing the assessable income of the taxpayer or a loss or outgoing necessarily incurred in carrying on a business by the taxpayer for the purpose of gaining or producing assessable income.

Long Service Leave

I intend to deal with each subject matter separately and first to consider Long Service Leave.

The taxpayer claims a deduction by way of a provision for Long Service Leave in relation to the said employees who had served with it, and with its predecessor, continuously for over fifteen years.

First, it claims that the whole of the provision, made at 30th June 1974 for Long Service Leave and relating to the said employees, is deductible as a loss or outgoing incurred under sec. 51(1) of the Act. Alternatively, it claims that at least the increment in the provision that it was entitled properly to make in its accounts at 30th June 1974 above the provision that it might have made at 30th June 1973, an increment caused by increases during the year in current rates of pay combined with a further year of service by the said employees, is so deductible.

The relevant Award must be construed in order to decide the nature of the taxpayer's obligation in connection with Long Service Leave. The Metal Trades (Long Service Leave) Award 1964 (hereinafter referred to as ``the Award'') provides that an employee shall be entitled to Long Service Leave with pay in respect of service with an employer as provided in the Award (cl.4).

Service means unbroken service as provided in the Award (cl. 5). It includes service with the employer before the commencement of the Award (cl. 5(4) subject to the provisions of cl. 6(4) of the Award).

Where, as in this case, a business is transmitted from one employer to another employer, and an employee of the transmittor becomes an employee of the transmittee, the continuity of employment shall not be deemed to be broken, and the service with the transmittor shall be deemed to be service of the employee with the transmittee (cl. 5(5) of the Award). It was common ground in this appeal that cl. 5(5) of the Award applied to the said employees and to the taxpayer in this appeal.

The amount of Long Service Leave to which an employee is entitled is prescribed by cl. 6 of the Award. Portion of cl. 6(2) was applicable to the present case and stated: -

``(2) Subject to sub-clause (4) hereof, the amount of long service leave to which an employee shall be entitled shall be -

  • (a) in the case of an employee who has completed at least fifteen years' service with an employer -
    • (i) in respect of fifteen years' service so completed, thirteen weeks; and
    • (ii) in respect of each ten years' service with the employer completed since he last became entitled to long service leave, eight and two-thirds weeks; and
    • (iii) on the termination of the employee's employment or his

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      death, in respect of the number of years' service with the employer completed since he last became entitled to an amount of long service leave, a proportionate amount on the basis of thirteen weeks for fifteen years' service.''

Clause 6(3) read:

``(3) Such leave shall be granted and taken and except as by this award permitted, payment in lieu thereof shall not be made or accepted.''

Counsel for the Commissioner relied on this subclause to submit that the Award related to leave from work rather than to money payable for services rendered.

Clause 6(4) of the Award was also relied on and insofar as relevant read: -

``(4) In the case of an employee whose service with an employer began before 11th May, 1964, and whose service would entitle him to long service leave under this award, the amount of long service leave to which such employee shall be entitled shall be the sum of the following amounts -

  • (a) an amount calculated on the basis of thirteen weeks for twenty years' service in respect of -
    • (i)...
    • (ii) such period of his service - before 11th May 1964 as was under the law applicable to such employee... taken into account for the calculation of his entitlement to long service leave thereunder and
  • (b) an amount calculated on the basis of thirteen weeks for fifteen years' service in respect of the period of his service.
    • (i)...
    • (ii)... on and from 11th May 1964.''

Having regard to the fact that at the 11th May 1964 the employee Auty had served with Oliver J. Nilsen & Co. Pty. Ltd. (the ``transmittor'') for twenty-six years and the employee Aughton for twenty-two years, and to the further fact that by 30th June 1974 each of them had served a further ten years, of which six were served with the transmittee, this clause becomes relevant to the calculation of their respective entitlements to Long Service Leave. Details of the Long Service Leave that each had taken at 11th May 1964, and at the date of transmission in 1968 were not given in evidence, but leave was reserved to prove these matters later should it become necessary to do so.

In Victoria, statutory provisions relating to Long Service Leave were introduced into the Factories and Shops Act 1928 by the Factories and Shops (Long Service Leave) Act 1953 (Act No. 5706). On the 11th May 1964, the date specified in cl. 6(4) of the Award, the relevant statutory provisions in Victoria were, I believe, contained in sec. 150-164 inclusive of the Labour and Industry Act 1958 (Vic.).

The amendment to that Act made by the Labour and Industry (Long Service Leave) Act 1964 (Act No. 7202) was not passed until 15th December 1964, after the Award with which I am concerned came into effect.

Section 154 of the Labour and Industry Act 1958 (Vic.) provided that on the completion of twenty years' continuous employment, a worker ``shall be entitled to long service leave on ordinary pay'' amounting to thirteen weeks, plus ``an additional three and a quarter weeks on the completion of each additional five years of continuous employment''.

The section also provided for a further additional proportionate period of Long Service Leave if, after the completion of more than twenty years' continuous employment, a worker's employment was terminated by the employer for any cause other than serious and wilful misconduct or by the worker on account of illness and the like. See sec. 154(2)(b) Labour and Industry Act 1958 (Vic.).

On the death of a worker who was entitled to any amount of Long Service Leave, his personal representative was entitled to be paid a sum equal to the amount of ordinary pay payable to the worker in respect of his Long Service Leave entitlement. See sec. 155(1)(2) Labour and Industry Act 1958.

I have accordingly concluded that both Messrs. Auty and Aughton became entitled to Long Service Leave after twenty years in the continuous employment of Oliver J.

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Nilsen and Co. Pty. Ltd., and that on transmission to the taxpayer in 1968, the provisions of cl. 6(a)(i)(ii) and (iii) of the Award applied to each of them, and, presumably, had applied to them since 11th May 1964 when they were still in the employment of the transmittor.

Clause 7 of the Award provides that the rate of payment to which an employee on Long Service Leave shall be entitled shall vary according to the ``wage then currently prescribed'' for the employee by the Award. The payment may be made in advance on the employee taking leave, or at the same times that it would have been made if the employee had remained on duty.

Other clauses of the Award relate to the time of taking leave, the taking of broken leave, and restrictions on employment whilst on leave.

Clause 8(2) of the Award provides: -

``(2)

  • (a) Where the employment of an employee is terminated otherwise than by his death and any long service leave -
    • (i) to which the employee was entitled has not been taken; or
    • (ii) accrues to the employee upon such termination the employer shall forthwith pay to the employee in full the amount in respect of such leave calculated as at that date of the termination in the manner set out in Clause 7(1) hereof less any amount already paid to the employee in respect of that leave.
  • (b) Where an employee dies and any long service leave -
    • (i) to which the employee was entitled has not been taken; or
    • (ii) accrues on termination of the employment by reason of his death the employer shall upon request by the employee's personal representative pay to the employee's personal representative in full the amount in respect of such leave calculated as at the date of the death of the employee in the manner set out in Clause 7(1) hereof less any amount already paid to the employee in respect of that leave.''

The taxpayer submits that, under the terms of the Award, the said employees are entitled to Long Service Leave on pay, and that their entitlement is correspondingly reflected in the taxpayer's obligation to grant such leave on pay (see cl. 8(1) of the Award). Though the entitlement of the employee is to be granted leave on pay, it is submitted that it is proper from the taxpayer's viewpoint to consider such entitlement as an entitlement to receive a sum of money without being on duty, an entitlement which does not cease on termination of the employment for any cause, whether it be on dismissal for any reason, retirement, resignation, ill health or even the death of the employee, (in which latter case the right is enjoyed by the personal representative of the deceased employee).

Considered in money terms by the taxpayer this is an accrued obligation on any accounting day to pay a sum certain to the said employees at some time in the future, even should their employment cease, for any cause, the instant next occurring. It is, the taxpayer submits, nonetheless an accrued liability though it may be varied in amount in the light of future events, such as pay variations. It may be precisely estimated from day to day. The only things not certain are the time when it will have to be paid, the precise period of the then entitlement and the then current rate of pay. But at any point of time the accrued entitlement of the said employees and the accrued liability of the taxpayer can be certainly calculated.

Counsel for the Commissioner submitted that the case is governed by the decision in
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492. Counsel submitted that that decision and the reasoning in support of it, has not been challenged in any subsequent case, and is good law. He also referred to and relied upon the decision in
F.C. of T. v. The Northern Timber & Hardware Co. Pty. Ltd. (1960) 103 C.L.R. 650. In this latter case, the court considered whether a provision for Long Service Leave made in the books of the taxpayer was deductible under the now repealed sec. 66 of the Act (see Act No. 110 of 1964 sec. 13). When it was sought to be argued that one of the employees of the taxpayer had become entitled to three months' Long Service Leave, and that the amount referable to that period amounted to a sec. 51 allowable deduction, the court said

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that, ``because the taxpayer's notice of objection plainly relates to the provision made in its books to meet future liabilities and not to an actual liability for a sum less than this provision, this ground was by reason of sec. 190(a) of the Act not open to the appellant; and no more need be said about it now''. (103 C.L.R. at 655).

However the court did say something more a little later, and the following passage appears (103 C.L.R. at p. 656):

``In F.C. of T. v. James Flood Pty. Ltd., it was recognised that although the amount of a provision for an employer's liability for annual leave to be granted, and paid for under an award was not deductible under sec. 51, the pay for annual leave would be deductible year by year as it was paid, and there can be no doubt that in a similar way pay for long service leave is deductible in the year in which it is paid. Indeed, it is not easy to see why pay for long service leave would not be deductible when made, notwithstanding that (if it were the fact) the amount of a provision made for such payments had been allowed as a deduction in accordance with the taxpayer's present claim.''

This last sentence is an obiter dictum, and in any event it is expressed in a manner indicating that no concluded opinion had been formed. (See also sec. 82(1) of the Act).

The Commissioner further submitted that the facts in the James Flood case were indistinguishable from the facts in the present appeal, and that this court was bound to follow it and dismiss this appeal.

It is convenient then, at the outset, to consider the facts and reasoning in the James Flood case and to determine whether the Commissioner's submission is correct, for if it is, that would be an end of the matter.

The James Flood case concerned Annual Leave, or as it was termed in the taxpayer's accounts, ``holiday pay''. The claim for a deduction was made in respect of the entitlement to holiday pay of employees who had not yet served for twelve months, and who had not yet qualified for Annual Leave.

Clause 13A of the Vehicle Builders' Award was construed by the court. Its effect is set out in some detail in the joint judgment delivered by the Court (see 88 C.L.R. at 501-3).

Before proceeding to decide the question in issue in that case the court carefully pointed out that,

``However serviceable generalised conceptions may be in relieving over burdened assessors and tax accountants of the need of examining particular situations, all a court can decide is the 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.''

(88 C.L.R. at p. 504)

It was the nature and incidence of the liability arising in the circumstances of the case and from the application of the provisions of the Award in question, which the court considered. The court held that the provisions of the Award as applied to the facts did not cause the taxpayer in that case to incur a loss or outgoing in gaining or producing ``the assessable income'' within the meaning of sec. 51(1) of the Act. The court did not hold that, as a concept, an accrued liability to pay Annual Leave cannot constitute an allowable deduction under sec. 51(1).

The reasoning of the court is set out clearly in the joint judgment delivered. The court appears to me to have placed emphasis upon the following important features:

  • ``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.''

(88 C.L.R. at 504)

In the present case, leaving aside for the moment the subject matter of Annual Leave and the two employees who had been employed for less than twelve months by the taxpayer, it appears to me that the Commissioner's submission that the facts in the James Flood case are indistinguishable from the present case cannot be sustained. The facts here and the terms of the Award appear to me to be materially different.

I have come to the conclusion that the very facts which, in the James Flood case, the court impliedly suggested might have led to a different conclusion, (had they existed), do exist in the present case on appeal.

They should perhaps be examined in detail.

In the present case, the said employees, Messrs. Auty and Aughton, had served more than fifteen years with the taxpayer and were at all times material entitled to Long Service Leave. (Clause 6(2) Metal Trades (Long Service Leave) Award 1964). They had qualified for leave (Contrast Items B. and E. above).

Their entitlement was, it appears to me, indefeasible. Whether they took their leave whilst still employed (cl. 8(1)(a), (aa), (b), (c) of the said Award), whether their respective employments were thereafter terminated in any way (cl. 8(2)(a) of the said Award), or whether they or either of them died (cl. 8(2)(b) of the said Award) the taxpayer was required by the provisions of cl. 8 to pay to each employee or, if dead, to his personal representative ``in full the amount in respect of such leave calculated as at the date of termination'' or ``death'' (as the case may be), or if leave was taken whilst the employee was still employed, payment was required to be made in one of the ways set out in cl. 7 of the Award.

This was not the case of a merely threatened, impending or expected liability (contrast Item B. above). The said employees had at all times material qualified for Long Service Leave. They were fully entitled to it.

The employer was ``definitively committed'' (contrast Item C. above) to pay

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them for Long Service Leave. The taxpayer by continuing to employ them in its business over the years had ``completely subjected'' itself to paying them Long Service Leave (contrast Item F. above). The contingencies present in the James Flood case were not present here (contrast Item A. above).

The use by the court in the James Flood case of the word ``definitively'' to qualify the adjacent word ``committed'' is perhaps important. It is repeated twice in the judgment and is to be found again in
Caltex Ltd. v. F.C. of T. 106 C.L.R. 205 at p. 220 per Dixon C.J. One may presume that neither court chose the word idly, and it appears to me that in this context the phrase conveys the meaning of ``committed'' in an unconditional way, or within limits that are able to be defined. A precise synonym for the word ``definitively'' may be the subject of debate, and if so, the present case raises such a debate.

However, the court, in its judgment in the James Flood Case, made it clear that it was ``probably going too far to say that the obligation must be indefeasible'', and also thought that ``it may be going too far to say that he'' (the taxpayer) ``must have come under an immediate obligation enforceable at law whether payable presently or at a future time''. (88 C.L.R. at p. 506).

As I construe the Award in the present case it appears to me that on the completion by an employee of fifteen years' service, the employer's obligation to pay to the employee thereafter an amount on account of Long Service Leave to be calculated in accordance with the terms of the Award, was in fact and in law indefeasible. It was also in certain circumstances an ``immediate obligation enforceable at law whether payable presently or at a future time'', within the meaning of those words in the passage cited above (see cl. 8 of the Award).

It was an accured obligation, not merely an inchoate liability in process of accrual. It was not subject to a variety of contingencies.

In my view also, the obligation was one which the taxpayer encountered as a direct result of the past employment of the said employees in the business, and a liability to grant Long Service Leave on pay had been completely incurred by the taxpayer before the end of the accounting year in question.

In the James Flood case, the court was at pains to say that it was not laying down a generalised rule which covered the subject of Annual Leave and Long Service Leave. It dealt only with the facts which were pertinent to the case before it, but, in laying down the principles applicable, it appears to me that the court impliedly indicated that if the facts had been as they are in the present case, it would have held that the taxpayer had in fact and in law incurred a loss or outgoing in gaining or producing the assessable income or that a loss or outgoing had been necessarily incurred by the taxpayer in carrying on a business for the purpose of gaining or producing such income.

I am of the opinion in the present case that the taxpayer's obligation accruing annually from 1968 onwards to pay to each of the said employees amounts to be calculated in accordance with the Award by way of payment for the Long Service Leave to which each of them had become entitled was a loss or outgoing incurred, and necessarily incurred, within the meaning of sec. 51(1) of the Act.

The next issue debated before me was whether, on the facts of this case, the taxpayer could deduct from its assessable income for the year ending 30 June 1974 the whole of the amount (insofar as it is properly calculated), representing the Long Service Leave accured entitlement of the said employees as at 30 June 1974, or whether it could deduct only a lesser sum, namely any increment in such entitlement occurring during 1973/1974, the year of income, by reason of increases in the current rates of pay prescribed for each of the said employees, and by reason of any further entitlement which had accrued due to them consequent upon the completion by the said employees of another year of service in the employment of the taxpayer. See Award, cl. 6(2)(a), cl. 7(1) and proviso cl. 8(2).

If my view as expressed above is correct, it would follow from the terms of the Award that in 1968 the said employees had become indefeasibly entitled to Long Service Leave, and were entitled to payment therefor by the taxpayer, on the transmission of the business and the said employees by Oliver J. Nilsen and Co. Pty. Ltd. to the taxpayer in 1968.

The said employees each continued to be employed by the taxpayer after transmission

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of the business to it, and from year to year thereafter earned annually a further proportionate entitlement to Long Service Leave under the Award. The taxpayer correspondingly became liable to pay to each of them a further proportionately calculated amount of pay for Long Service Leave. There were no contingencies attaching to this liability. It accrued due from year to year.

The mere fact that the amount payable increased as each year passed, did not mean that on each annual accounting day the precise liability as at that date, could not be accurately calculated. In fact it could.

Even if during or after 1968 the said employees were granted and took all of their outstanding Long Service Leave entitlement, and then resumed work, they would thereafter have become annually entitled to a further proportionately calculated period of Long Service Leave on pay, which entitlement would itself be indefeasible and not subject to any contingencies. Once the initial qualifying period of twenty years was served by the said employees in the employment of the transmittor, their entitlement to further increments of Long Service Leave on pay accrued due annually and the taxpayer's liability to pay them in respect of such entitlement was complete.

It is true that it was only when leave was granted, or the employment terminated or the employee died, that the ``rate of wage then currently prescribed'' (cl. 7(1) of the Award) would be known, and the employee's then entitlement would be ascertainable, so that then the amount payable by the taxpayer would be finally and unalterably fixed, by payment. The liability would then be realised.

The Commissioner contended that for this reason the taxpayer's liability could not be said to be certain at any earlier point in time, and that therefore, not being certain, it should not be considered as a loss or outgoing incurred at any earlier time.

But the fact that the amount calculated as the present obligation, might be altered by changed circumstances - either up or down - according as in the future the ``rate of wage then currently prescribed'' varied, did not, in my view render the obligation any the less an accrued liability at the end of the accounting year in question. The taxpayer was nonetheless, in my view, ``definitively committed'' at the end of each year of service.

This view appears to me to be consistent with the principles expressed in many of the decided cases. See
Armco (Australia) Pty. Ltd. v. F.C. of T. (1948) 76 C.L.R. 584, 618;
Ballarat Brewing Co. Ltd. v. F.C. of T. (1951) 82 C.L.R. 364, 366, 368; Caltex Ltd. v. F.C. of T. (1960) 106 C.L.R. 205, 226-7;
R.A.C.V. Insurance Pty. Ltd. v. F.C. of T. 74 ATC 4169, 4176-7, (1975) V.R. 1;
Aluminium Corporation Ltd. v. F.C. of T. 77 ATC 4151, 4160-1;
Commercial Union Assurance Company of Australia Limited v. F.C. of T. 77 ATC 4186, 4195-6;
International Nickel Australia Limited v. F.C. of T. 77 ATC 4383.

If the accrued liability had been allowed as a deduction from the transmittor's assessable income by the Commissioner and the said employees and business had been transferred without regard to the Long Service Leave liability assumed by the taxpayer (an unlikely enough hypothesis), the transmittor would in the year of transmission have realised a ``gain'' which would have formed part of its assessable income of that year.

Any variation in the amount calculated to be owing to the said employees from one year to another would, from an accounting view-point, result in a corresponding loss or gain to be reflected in the accounts right up to and including the time that the amount was in fact paid.

It is made clear in the authorities, (if it was not already clear as a matter of statutory interpretation that accounting practice is not to rule when determining whether a particular expense is a loss or outgoing incurred within either of the limbs of sec. 51(1) of the Act. However, it is suggested that accounting practice may assist the court in making such a determination, presumably because the words ``loss or outgoing'' and the word ``incurred'' are themselves, in their context, accounting terms.

At the very least, ``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 sec. 51(1), but it cannot be substituted for the test''. F.C. of T. v. James

ATC 4346

Flood Pty. Ltd. (1953) 88 C.L.R. 492, 506-7; cf.
B.P. Australia Ltd. v. F.C. of T. (1965) 112 C.L.R. 386, 403;
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1951-52) 85 C.L.R. 423, 435;
F.C. of T. v. Becker (1952) 87 C.L.R. 456, 467;
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314, 320; International Nickel Australia Ltd. v. F.C. of T. 77 ATC 4383, 4385-6, 4394; Carden's case (1938) 63 C.L.R. 108, 154-5.

The evidence which was led before me from several eminent accountants (all of them called by the taxpayer) accords with the view which I have expressed as to the treatment of provisional items. Their evidence, which I accept, is that prudent accounting would require that the income of a taxpayer, (whether a private person or a public company), 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.

The evidence is that it is the practice of accountants always to make an appropriate provision in the accounts of their clients for the payment of Long Service Leave to employees who have completed fifteen years' service. But perhaps serving to exemplify the point that accounting practice should not be permitted to override or control the legal interpretation to be given to the provisions of sec. 51(1), the evidence also establishes that it is considered to be prudent accounting practice to make an appropriate provision in a client's accounts for the payment of Long Service Leave to employees who have completed only ten years' service, and have not yet qualified for or gained an absolute entitlement to leave. See cl. 6(2)(b) of the Award.

The principle expressed in the James Flood case may well stamp the latter prudent practice as not being in accord with the legal criteria implicit in the wording of sec.51(1) of the Act; but I have not to decide the issue that arises in connection with Long Service Leave when considering employees who have served only ten years in continuous service.

The taxpayer in the present case had, from the 30th June 1969 onwards, adopted the practice of making a charge against its profits, as shown in its annual accounts, of an item representing any increase or decrease in its then provisional liability to pay Long Service Leave. It provided in its Balance Sheet and Profit and Loss Account for Long Service Leave payments, both to employees who had served for 15 years and to those who had served for only 10 years. To arrive at this provision to be made in its Balance Sheet, it multiplied the calculated entitlement of those employees to weeks of Long Service Leave by the current rate of weekly pay applicable to each such relevant employee.

Thus, in each succeeding year, at the end of the accounting period, it calculated the figure for which provision had then to be made in the Balance Sheet and, after deducting from the previous year's provision any payments for Long Service Leave which had in fact been made during the year, it subtracted the balance of the previous year's provision from the current year's provision and charged the difference to the Profit and Loss Account for the year.

For example, if $5,000 was the provision for Long Service Leave as calculated at 30 June 1969 and, during the year 1969-1970 $2,000 had been paid to employees by way of Long Service Leave, the taxpayer calculated at 30 June 1970 what provision it was then necessary to make, and if it arrived at a figure of, say, $6,000, it would charge $3,000 to the Profit and Loss Account for the year ending 30 June 1970.

The taxpayer adopted the same practice in its accounts when considering the subject of Annual Leave, to which I will come later in this judgment.

The taxpayer continued to prepare its own accounts in this way until the year ending 30 June 1974. However, from 1969 to 1973, when furnishing its returns for taxation purposes, it adjusted its profit as shown in its Profit and Loss Account by adding back so much of the item representing Long Service Leave, as was merely provisional, as distinct from amounts actually paid out during the current year

It paid tax annually during those years on a taxable income arrived at without deducting from assessable income its Long Service Leave liabilities (as distinct from

ATC 4347

Long Service Leave payments actually made during the year).

The Commissioner now contends that, even if the taxpayer was entitled to deduct from the assessable income under sec. 51(1), such amounts as accrued due annually over the years 1969-1973 in respect of a liability to pay Long Service Leave, (but did not do so) the taxpayer was not entitled, in the income year ending 30th June 1974, to deduct from its assessable income for that year, the whole of the sum representing its accrued liability to pay Long Service Leave, but only so much of that sum as actually accrued due during that year of income.

In Commercial Union Assurance Company of Australia Limited v. F.C. of T. 77 ATC 4186 at 4196, Newton J. left a similar question unanswered, saying -

``Having regard to the conclusions just expressed,it is unnecessary for me to consider the question whether this second argument of the Commissioner would be correct, if in fact there had been a material difference between the character of the sum of $39,559,704 and the character of the sum of $60,020,125, so that in the year ended 30th June 1973, there was a relevant change in accounting methods as compared with the year ended 30th June 1972. If an insurer were to carry on business for five years without making any provisions for outstanding claims in its annual accounts, and if its taxable income for each of those five years were to be assessed on that footing without objection, would the insurer be entitled in the sixth year to make a provision for claims outstanding at the end of that year and to have the amount of that provision treated as an allowable deduction under sec. 51 in the calculation of its taxable income for that year without bringing into account any notional provision for claims outstanding at the beginning of that year? I express no views upon this question. Reference may be made to
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at pp. 4063-66; (1975) 132 C.L.R. 175 at pp. 185-189 per Barwick C.J. and at ATC 4070-72; C.L.R. 195-199 per Mason J. and to
Henderson v. F.C. of T. 70 ATC 4016 at 4018-20; (1970) 119 C.L.R. 612 at pp. 648-650.''

In the present case, the substantial part of the taxpayer's liability for Long Service Leave claimed in this appeal as a deduction had accrued due over the years preceding the income year 1973-1974. It had not been claimed as a deduction by the taxpayer and, the Commissioner contended, it could not be claimed as a deduction in a later year merely, as it were, at the taxpayer's behest.

In my view, both the Commissioner and the taxpayer had been in error over the preceding years.

If I am right in holding that the taxpayer was completely subjected to a liability to pay Long Service Leave to the said employees over the years 1969-1973 inclusive, it is, I think, clear that both the Commissioner and the taxpayer mistakenly thought otherwise during those years. Each acted bona fide. The mistake appears to have been one of law. All the facts were disclosed by the taxpayer. No estoppel arises, nor in my opinion does such a mistake of itself make what would not otherwise be an allowable deduction in the year ending 30 June 1974, an allowable one.

It was submitted on behalf of the taxpayer that as a matter of accounting practice, if an error as to profits is made in the accounts of one year, and it is later discovered, a correcting entry should be made and a corresponding decrease or increase in the profits thrown up in the year in which the error is discovered and the correcting entry is made.

Evidence of accounting practice to this effect was given by an accountant called by the taxpayer, and there appears no reason to doubt his evidence. It may be sound common-sense and may accord with accepted accounting and commercial practice, but the question I must decide is whether it falls within the statutory provisions of the Act.

Apart possibly from sec. 170, I see no provision in the Act which countenances any such accounting practice, and in my view it is not a practice which is permitted, unless the error or mistake falls within the special provisions of sec. 170.

Section 82(1), relating to double deductions, may be borne in mind when considering whether the deduction claimed (if not now allowable, but not claimed earlier because of the Commissioner's approach to

ATC 4348

them) can be deducted on actual payment, even where a return is made on an accrual basis. But it does not assist on the question of the correction of errors or mistakes such as this, before the date of actual payment of the accrued liability.

Reliance was also placed by the taxpayer on what was said in A.G.C. (Advances) Limited v. F.C. of T. 75 ATC 4057; (1974-5) 132 C.L.R. 175. That case had raised the question whether a scheme of arrangement worked, by implication, an assignment by the taxpayer of its beneficial interest in all the book debts due to it at the date of commencement of the scheme.

That issue being decided against the Commissioner, it was then debated whether certain debts written off were, in fact, allowable deductions under sec. 63 of sec. 51(1) of the Act.

The taxpayer conceded that so much of the debts as were owing by hirers of goods, which had not been brought to account as assessable income, could not fall within sec. 63(1)(a) or (b) of the Act.

It claimed that these outstanding term charges, not brought to account as assessable income, fell within sec. 51(1) as losses ``incurred in gaining or producing the assessable income'' or ``necessarily incurred in carrying on a business for the purpose of gaining or producing such income''.

The amounts in question related to transactions conducted over preceding years, and although no point seems to have been made of it, some of them were so old as to be statute barred.

The point raised was that ``no precise relationship existed between the writing off of the debts, which for this purpose seems to have been regarded by counsel as the time at which the loss was incurred, and the gaining of assessable income which was the subject of the return in the particular year in which the deduction was sought to be made''. (See 75 ATC at 4064; 132 C.L.R. at 185 per Barwick C.J.).

It is now clear that the expression ``in gaining or producing'' appearing in sec. 51(1) ``has the force of `in the course of gaining' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to the purpose itself''.
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295, 309; see also
F.C. of T. v. Finn (1961) 106 C.L.R. 60, 66.

The expenditure must be incidental and relevant to the end of gaining or producing the assessable income.
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, 56.

The outgoing in this case, being a liability to pay Long Service Leave, was in my view clearly incidental and relevant to this end. It was inevitably encountered in the course of gaining assessable income. But that is not necessarily to decide the issue here.

The issue here is, ``should the deduction have been made at an earlier stage'', and allied with this issue is another, ``if the liability should have been deducted earlier, and was not, can it be deducted later?''

The taxpayer claims that it was legally entitled to make the deduction at any time that it chose, although I think perhaps it need not have gone so far in its argument. It would have been sufficient to submit that it was, in the circumstances, entitled to deduct the outgoing in the year ending 30th June 1974.

The business conducted by the taxpayer here was a ``continuing business''. (De Bavay's case (supra)). Income was returned on an earnings basis. It is now established that the loss or outgoing in either limb of sec. 51 need not be restricted rigidly to the gaining or production of the assessable income of the current year. See
Ward & Co. v. Commr. of Taxes (1923) A.C. 145, 148; De Bavay's case (supra at p. 309): Ronpibon case (supra at p. 56); Finn's case (supra at p. 68).

This proposition is clearly expounded in A.G.C. (Advances) Ltd. v. F.C. of T. (above) where the learned Chief Justice, Sir Garfield Barwick, states -

``It is not possible now, to construe sec. 51 to mean that the expenditure and losses to be deducted must relate precisely to the assessable income which is returned for a year in which the expenditures are made or the losses are suffered.''

(See 75 ATC at 4064; 132 C.L.R. at 185). But again, this does not suffice to decide the point in issue here.

ATC 4349

It is true that in the A.G.C. (Advances) Ltd. case the writing off of the debts was not all done within sec. 63, which section might on one view seem to allow to the taxpayer an unfettered discretion to decide when to write off its debts.

Some of the writings off in that case were effected and claimed and allowed as deductions falling within sec. 51(1) of the Act. There was, as I see it, no rime or reason ascribed by the taxpayer for claiming such a deduction under sec. 51(1) in the particular income year in question, other than that they were written off in that year and were clearly losses or outgoings incurred by the business and were incidental and relevant to the end of gaining or producing the assessable income of a continuing business over the years that had passed.

As the Chief Justice said in the A.G.C. (Advances) Ltd. case (supra) -

(75 ATC at 4064; 132 C.L.R. at 186), (my emphasis).

In the present case, it seems to me that a provision relating to the Long Service Leave liability of the taxpayer may appropriately be said to be related ``to the gaining of assessable income which may have been already gained and returned or which may yet be gained and returned''. (75 ATC at 4065; 132 C.L.R. at 186).

Payment of Long Service Leave does not, of its very nature, relate to any one year of assessable income. It is attributable to the whole of the past service of the relevant employee, during which time he has assisted in gaining assessable income for the taxpayer over at least fifteen, and in this case, more years.

Nor is it something that once incurred remains a static liability. It may be a changing liability, increasing or decreasing from year to year, recalculated from year to year, and once present, ever present until realized.

The fact that it could have been in part claimed as a deduction of the previous year - or years - does not of course lessen the existing liability of the taxpayer to pay it on the accounting date of the year of income in question.

But it is not the existence of the obligation which is in question. On this hypothesis, it is assumed. The question is whether it was incurred in the year ending 30 June 1974, and if not, whether in the circumstances it can be claimed in that year.

If the test of appropriateness is to be applied to the calculation of the taxpayer's taxable income returned in 1974, then it is argued by the Commissioner that the assessable income of the taxpayer for the year ending 30 June 1974 should have deducted from it (if anything), only the appropriate sum representing the taxpayer's liability to pay Long Service Leave to its employees which accrued due in that year of income. If it is incurred at any time before payment, it is only incurred at the time it accrues due.

Thus, the Commissioner's submission is that it is only when the liability became accrued that the taxpayer can deduct it, whether or not the business is a ``continuing one''. An omission to claim a deduction when the liability accrues due is fatal, in that it can never be deducted until (presumably) it is actually realized or paid by the taxpayer. Armco case (1948) 76 C.L.R. 584, 618 per Dixon J. International Nickel Australia Limited v. F.C. of T. 77 ATC 4383 at 4386 per Gibbs J.

The taxpayer, on the other hand, submits that such a conclusion is opposed to commonsense. But in my opinion, the fact that both the Commissioner and the taxpayer mistakenly proceeded in earlier years on the basis that an accrued liability to pay Long Service Leave was not a loss or outgoing incurred in the year that the liability accrued due, cannot make it a loss or outgoing of a subsequent year, if otherwise it is not such a loss or outgoing, cf.
Country Magazine Pty. Ltd. v. F.C. of T. (1968) 117 C.L.R. 162, 165-6.

ATC 4350

Reference was made also to Henderson's case, ((1970) 119 C.L.R. 612) where the Chief Justice, Sir Garfield Barwick said -

``Of course, the experience of a prior year may be reflected in the opening figures of the relevant year but they become and are figures of that year and not figures of two years in combination. Once it is decided that the partnership income derived in the year in question will be the net amount of its earnings of that year, it is, in my opinion, only the earnings of that year which can be included in the computation.''

(See (1970) C.L.R. at 649).

There were in the present case no opening figures at 1st July 1973 relating to the item, Long Service Leave, for in the preceding year the taxpayer had (to the Commissioner's knowledge) corrected its own accounts by adding back the provision made there, and it returned as taxable income a sum which took no account of its accrued liability to pay Long Service Leave.

The taxpayer submits that, when looking at the taxpayer's earnings in the year ending 30th June 1974, and when considering what losses and outgoings it incurred, you look first at what the taxpayer in fact paid out to employees who took Long Service Leave. Those payments are clearly allowable deductions. Next, you look to see what sum has at the 30th June 1974 accrued due in respect of employees' entitlement to Long Service Leave. There are no opening figures because no deduction has previously been allowed in relation to this item, and so the whole of this sum, it is submitted, is also deductible. It is, at the accounting date, a sum which the taxpayer is then absolutely liable to pay. It has been incurred in the course of gaining or producing the assessable income over the years that have gone before.

The taxpayer submits that the fact that the employer was liable similarly to pay most of the sum claimed, at the end of the preceding income year does not alter the fact that it is liable to pay the sum at the 30th June 1974. Its nature has not varied. It is still just as much a debitum in praesenti solvendum in futuro. It will recur each year until it is in fact realized by payment, although a deduction in respect to the precise amount owing at any one time to specified employees will only be allowed once. The taxpayer ``will not be allowed to deduct what has been deducted before''. Cf.
Vallambrosa case (1910) 5 T.C. at 535.

The crux of the matter appears to me to be whether it is necessary for the taxpayer, on the facts of this case, to establish that the whole of its accrued liability to pay Long Service Leave to its employees is a loss or outgoing ``incurred'' in the year in which it is claimed as a deduction.

It is established that ``the assessable income'' referred to in sec. 51(1) need not be the assessable income of the taxpayer for the income year ending 30th June 1974.

That is to say, the fact that ``the losses related to the earning of income in antecedent years, and not to the earning of income in the year in which the losses were incurred, is not a disqualifying circumstance, as previous decisions of this court have established - see Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 and the cases there referred to''. A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; 132 C.L.R. 175 per Mason at ATC 4070; C.L.R. 195. See also per Barwick C.J. at ATC 4064; C.L.R. 189, per Gibbs J. at ATC 4068; C.L.R. 192.

But in the last mentioned case it was assumed that the losses themselves were incurred in the year when the debts were written off, and it was in that year that the taxpayer claimed them as an allowable deduction under sec. 51(1). In this connection the Chief Justice, Sir Garfield Barwick said -

``No precise relationship existed between the writing off of the debts, which for this purpose seems to have been regarded by Counsel as the time at which the loss was incurred, and the gaining of assessable income which was the subject of the return in the particular year in which the deduction was sought to be made.''

(See 75 ATC at 4064; 132 C.L.R. at 185).

Gibbs J. said -

``It may be assumed that the losses were incurred when the amounts were written off, that is in the income tax years ending respectively on 30th June 1970 and 30th June, 1971.''

(See 75 ATC at 4068; 132 C.L.R. at 192).

ATC 4351

Mason J. said -

``That the relevant amounts were losses incurred at the time when they were written off is not in question.''

But, in the present case, the very point assumed in the A.G.C. (Advances) Ltd. case, is in my opinion the point in issue, and the taxpayer gains little, if any, support from that decision.

Nor is the present case one in which, for the first time, the taxpayer assumes a wholly new method of calculating its income, so as to give a substantially correct reflex of its true income, as when the taxpayer changes from a cash receipts to an earnings or accruals basis of returning its income. It had been returning its income on an earnings or accruals basis for some years. But it had not been doing so with respect to its accrued Long Service Leave commitment to the said employees.

Can one say that in previous years, the method of calculating the taxpayer's assessable income had been such that it was not ``calculated to give a substantially correct reflex of the taxpayer's true income'' (
Carden's case (1938) 63 C.L.R. 108, 154), and that the Commissioner and the taxpayer had both concurred in this, and that in the year ending 30th June 1974, the taxpayer correctly calculated its assessable income and was entitled to claim in that year as a loss or outgoing incurred, the whole of its then existing liability to pay Long Service Leave, for which it had not previously been allowed a deduction.

In the James Flood case the Full Court said -

``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 there has been no actual disbursement.''

((1953) 88 C.L.R. at 506) (my emphasis).

The Commissioner's submission requires that the words, ``to which the taxpayer is definitively committed in the year of income'' (appearing in the above extract), should be restrictively read as meaning ``to which the taxpayer becomes definitively committed in the year of income''.

However, it is not by examining extracts from cases decided on other points that a decision is to be reached, for the question is in my opinion essentially one of the temporal connotation to be given to the words ``losses or outgoings incurred'', appearing in sec. 51(1) of the Act.

It is my view that the losses or outgoings referred to in the section must be losses or outgoings of the year in which they are claimed as an allowable deduction and this is so whether they relate to past or future assessable income. There must be an immediate liability accrued within the accounting period, there being no actual expenditure, cf.
Jolly v. F.C. of T. (1934) 50 C.L.R. 131, 137. Losses or outgoings are incurred within the meaning of sec. 51(1) either when they accrue due or when they are realized.

If they are not claimed as an allowable deduction in the tax year in which they accrue due, they cannot be claimed as an allowable deduction in any subsequent year of income until the year when they are realized by payment. Any other construction would in my view lead to chaos and would be out of harmony with the Act. It is difficult to see how it would give a substantially correct reflex of the taxpayer's true income.

In my opinion therefore the taxpayer in the present case was not entitled to claim in the year ending 30 June 1974, as an allowable deduction from its assessable income under sec. 51(1) of the Act, so much of its then existing liability to pay the said employees for Long Service Leave as had accrued due and was in law claimable as a deduction in preceding years.

However, it was entitled, in my opinion, to claim as a loss or outgoing incurred in the year ending 30 June 1974, so much of the said liability as accrued due during the said year. This would certainly include any increment in the entitlement of the said employees to pay for Long Service Leave consequent upon the fact that they had each served another year in the employment of the taxpayer; and, in my opinion, it would also entitle the taxpayer to claim any increase in

ATC 4352

the sum which it was definitively committed to pay the said employees for Long Service Leave, caused by increases during the said year in the current rate of pay above the rate applicable at the end of the previous income year.

As a corollary any decrease in the current rate of pay would work a gain for the taxpayer, which would swell his income in the year in which it occurred cf. International Nickel Australia Ltd. v. F.C. of T. (above) at 4386-7 per Gibbs J., at 4394 per Mason J., at 4396 per Murphy J.

It is true that in the exchange cases, the fact situations with which the courts have involved a comparison between the calculation of the amount of the liability in the year in which it accrues and the amount needed to satisfy the liability in the year in which it is in fact realized or paid. However, when considering Long Service Leave, an annually accruing liability, it is my view that sec. 51(1) entitles the taxpayer in this case to calculate yearly the sum of its accrued liability to the said employees, taking into account any variation that has occurred in the multipliers involved, in order to arrive at the loss or outgoing incurred in the current year in the course of gaining or producing the assessable income.

Annual Leave

The taxpayer also claimed to be entitled to an allowable deduction from assessable income in the year ending 30 June 1974 of:

Here again the Commissioner relied upon the principle expressed in the James Flood decision.

The Award applicable is the Metal Industry Award 1971 (Exhibit C).

Clause 25 of that Award relates to Annual Leave. It is a lengthy clause having nineteen subclauses, namely (a) to (n) inclusive.

Its terms have to be construed insofar as relevant. I shall not set out here the whole of the clause, but only so much as appears to me to be necessary.

``25 (a) Period of Leave A period of twenty one consecutive days' leave shall be allowed annually to an employee after twelve months continuous service (less the period of annual leave) as an employee on weekly hiring...

(d) Broken Leave The annual leave shall be given and taken in one or two continuous periods. If the annual leave is given in two continuous periods then one of those two periods must be of at least twenty one consecutive days.

(f) Calculation of Service Service before the date of this award shall be taken into consideration for the purpose of calculating annual leave but an employee shall not be entitled to leave or payment in lieu thereof for any period in respect of which leave or a payment in lieu thereof has been made...

(g) Leave to be taken The annual leave provided by this clause shall be allowed and shall be taken and except as provided by sub-clauses (1) and (m) hereof payment shall not be made or accepted in lieu of Annual Leave.

(h) Time of Taking Leave Annual leave shall be given at a time fixed by the employer within a period not exceeding six months from the date when annual leave accrued and after no less than four weeks' notice to the employee.

(i) Leave Allowed Before Due Date An employer may allow an employee to take annual leave either wholly or partly in advance before the right thereto has accrued due.

(j) Payment for Period of Annual Leave Each employee before going on leave shall be paid the wages he would have received in respect of the ordinary time he would have worked had he not been on leave during the relevant period...

(l) Proportionate Leave on Termination An employee on weekly hiring who:

  • (i) after one week's continuous service in his first qualifying twelve monthly period with an employer, lawfully

    ATC 4353

    leaves the employment of the employer or his employment is terminated by the employer throughout no fault of the employee or
  • (ii) after twelve months continuous service with an employer, leaves the employment of the employer or his employment of the employer or his employment is terminated by the employer for any reason,

shall be paid at the appropriate rate of wage - for so many hours for each five ordinary working days worked.''

The Commissioner submitted that there was nothing in this Award which would lead it to be construed differently from the Award which was considered in the James Flood case.

Counsel on his behalf submitted that the taxpayer's Annual Leave liability to employees was no different from its liability to pay to employees their next week of wages, after the accounting date.

It was submitted that the employee has no right of action unless he leaves the taxpayer's employment or his employment is terminated. Counsel emphasised that the concept of the Award is the right to leave on pay, rather than to pay in lieu thereof. The right to pay only arises when the employee actually goes no leave or is sent on leave.

Thus it was said the liability is only impending, threatened or expected, and the facts in Flood's case are indistinguishable.

The taxpayer contended that the inclusion in the Metal Industry Award 1971 of subcl. (1) ``revolutionises'' the operation of the whole clause and takes it outside the facts which led to the decision in the James Flood case.

It was submitted that the effect of subcl. (1) was to make absolute the liability of the taxpayer to pay Annual Leave sums to employees who had served more than twelve months continuous service with it. The liability was then incurred. It had to be satisfied, whether the employment was terminated by the employer for any reason, or whether the employee left the employment for any reason, or whether the employee went on leave.

It was submitted that this extended to cover the case, or in any event was understood in practice to cover even the case of an employee leaving the employment through death.

It was submitted that, seeing that this liability was coupled with a qualifying period of twelve months past continuous service by the employee with the taxpayer, the liability accrued in respect of and related to past service, and it was accordingly an accrued liability and appropriate to include it when considering the past results of the business in the accounting year.

The vital distinction between the facts in the present case and those existing in the James Flood case was stressed, namely that here, the employees, (save for two of them), had qualified by more than twelve months continuous service for Annual Leave, and the award entitled them to pay commensurate with such entitlement, not subject to contingencies.

I have already stated above my understanding of the important features leading to the decision in the James Flood case. It is, on the facts, clearly distinguishable from this case. Indeed, the court there relied upon the fact that the employees with whom the case was concerned, had not qualified for Annual Leave by completing twelve months continuous service (see particularly (1953) 88 C.L.R. at pp. 505, 507).

In my view, the taxpayer is here entitled to claim as a loss or outgoing incurred, in the year ending 30 June 1974, such sums as were then owing for Annual Leave to employees who had served continuously for more than twelve months, and related to their entitlement to Annual Leave that had accrued due and had not been paid during the accounting year.

What I have already said above concerning Long Service Leave, applies equally to Annual Leave, and the taxpayer could not claim as a deduction in the year ending 30 June 1974 any sum which accrued due in respect of annual leave in the year ending 30 June 1973, and remained due at 30 June 1974, if for some reason it was not paid during the latter year.

But in the case of Annual Leave it is unlikely that there will be any such sums, for

ATC 4354

the Metal Industry Award 1971 provides that -

``Annual leave shall be given at a time fixed by the employer within a period not exceeding six months from the date when annual leave accrued.''

Clause 25(h)

The Commissioner had submitted that if the taxpayer's liability to pay Annual Leave to any of its employees did constitute a loss or outgoing incurred within the meaning of sec. 51(1) of the Act, then only the sum by which the amount of the taxpayer's accrued liability to pay Annual Leave at the 30th June 1974 exceeded the amount of its accrued liability in respect of the same employees at 30th June 1973, could be deducted.

But of its nature the liability to Annual Leave accrues due annually and is realized within six months. Prior to 30th June 1974, it had not been claimed on accrual as an allowable deduction in the taxpayer's returns. It had been claimed only on realization or payment, and it was always allowed by the Commissioner on payment - but disallowed, if it had merely accrued due, and had not been paid.

I see no good reason why, in the year ending 30th June 1974, the sum representing the amounts which accrued due to employees who had been continuously employed for over twelve months at 30th June 1974, should not be deducted as a loss or outgoing incurred in that year of income.

The decisions to which I have referred above stress that in a ``continuing business'' the date of accrual of the liability, and the date of actual payment are the relevant dates to consider when determining the quantification of the amount of any deduction allowable under sec.(1) of the Act.

The Commissioner's submission is only correct, if and insofar as the amount claimed as an allowable deduction by the taxpayer and representing its accrued liability to pay Annual Leave at 30th June 1974, includes a sum which had already accrued due at 30th June 1973 and ought therefore to have been claimed as an allowable deduction in the previous year.

Subject to a precise examination of the actual figures and facts, which the parties have not (as I understand them) required me to perform at this stage, I would not expect the amount of the taxpayer's claim in respect to its Annual Leave accrued liability at 30th June 1974, to include as a component a sum which had already accrued due at 30th June 1973. I would expect such liability to have been in fact realized during the year ending 30th June 1974.

With regard to the claim in respect of two employees of the taxpayer who had not at the 30th June 1974 served continuously for twelve months, it is my view that the taxpayer's Annual Leave liability to them was inchoate. (See cl. 25(e)(i) of the Metal Industry Award 1971). It had not accrued due. It did not constitute a liability to which the taxpayer had completely subjected itself. It was subject to many contingencies. See F.C. of T.v. James Flood Pty. Ltd. (above).

Accordingly in my view, the sum claimed in respect of them was not a loss or outgoing incurred during the year ending 30 June 1974 in gaining or producing the assessable income and is not an allowable deduction under sec. 51(1) of the Act.

The appeal should be allowed to the extent outlined in these reasons, and I invite counsel's submissions as to the precise form of the order to be made, on the assumption that, as counsel anticipated at the hearing, the appropriate figures to be applied have been agreed.

I will publish these reasons and await counsel's submissions. I adjourn the matter sine die.

 

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