Case U9

Members:
HP Stevens SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 12 December 1986.

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H.P. Stevens (Senior Member)

The question for decision in this application is whether or not the Commissioner has acted correctly in including in the applicant's assessable income in terms of sec. 25(1) or 26(j) for the period ended 30 June 1983 an amount of $95,200 relating to "holiday pay" of employees of an acquired business.

2. Immediately prior to February 1983 a company A was interested in acquiring the international operations of another company B. B conducted these operations both through a division located in Australia and one location overseas and through a wholly owned subsidiary C which also had a number of wholly owned subsidiaries and affiliates in which it C had a less than 100% interest. One of the wholly owned subsidiaries of C was the applicant D. As at 31 January 1983 the position of C and its subsidiaries was that upon consolidation its liabilities exceeded its assets. Negotiations took place between A and B and in due course an agreement dated 15 February 1983 was executed.

3. In summary the agreement provided that A would acquire B's shares in C for a figure payable on completion (22 February 1983) and B would compensate A for any shortfall (after forgiving loans) in respect of the deficiency upon consolidation of C (auditors to prepare after completion the necessary statement of assets and liabilities). The agreement also made provision for the acquisition of the division located in Australia and at one overseas location. In this regard cl. 7 provided:

"After completion of this Agreement (B) shall, if requested in writing so to do by (A) and/or (D) within one month of such completion, sell to (D) the business of its division carried on in Australia under the name `......' by way of (D) purchasing all the assets (the value thereof to be established on the same basis as assets are to be recorded under Clause 4(2) and (3) above) which will include the registered business names `......' and `......' and the benefit of lease agreements, and assuming (and indemnifying (B) against) all the liabilities (to the extent established as hereafter mentioned) thereof for a price representing the amount by which such assets exceed such liabilities. In the event of any such sale (B) shall give to (D) in relation to such sale such warranties as may be agreed between (the solicitors). The parties will procure that (firm of chartered accountants) shall following any such sale carry out with due despatch an audit and prepare an audited statement of assets and liabilities of the division at the date of such sale and shall issue a certificate to (B), (A) and (D) stating the price payable in respect of such sale. Either (B) or (A) may challenge the certificate issued by (accountants) and after any questions have been resolved (accountants) shall issue a new certificate stating the price. If any

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question cannot be resolved between the officers of (B), (A) and (accountants), the same shall be referred to the president for the time being of The Institute of Chartered Accountants in Australia or his nominee acting as an expert not as an arbitrator and his decision shall be final and binding on the question. The price shall constitute an interest free loan from (B) to (D). Notwithstanding the foregoing (D) shall on such sale agree to indemnify (and (A) shall ensure that it does so indemnify) (B) against the liabilities under the aforementioned lease agreements. All costs (including any stamp duty) of or associated with any sale pursuant to a request under this Clause shall be for the account of (B), except that audit costs will be borne equally between (B) and (A)."

Schedule 11 to the agreement, inter alia, stated:

"the audited statements of assets and liabilities previously referred to will respectively be accurate and give a true and fair view of the state of affairs of each of (C) and the subsidiaries and will make full disclosure of and appropriate and adequate provision for all their actual and contingent liabilities."

4. No offer in writing was made in terms of cl. 7 by either A or D but a verbal offer by the secretary of D was accepted by B at a directors meeting of 23 March 1983 upon the terms and conditions set out in an annexure to the minutes. Such terms and conditions (also attached to the director's minutes of D of 18 March 1983 which authorised the offer) were:

"1. The purchase shall be effected by way of (D)

• (a) purchasing from (B) all the assets (other than book debts due or owing by customers) employed as at the end of 27 February 1983 in the carrying on of the business of international... (the value thereof to be established on the same basis as assets are to be recorded under Clause 4(2) and (3) of Agreement dated 15 February 1983 between (A) and (B) such assets to include the registered business names `...... ' and `......... ' and the benefit of lease agreements (although no value is or shall be in the audited statement hereinafter referred to attributed thereto); and
• (b) assuming (and indemnifying (B) against) all the liabilities as at 27 February 1983 of the business (to the extent established as hereinafter mentioned)

for a price representing the amount by which the value of such assets exceeds the amount of such liabilities.

2. The purchase is to be subject to (B) giving to (D), warranties in the form set out as an attachment hereto.

3. The parties will procure that (accountants) shall following the acceptance of the offer carry out with due despatch an audit and prepare an audited statement of assets and liabilities of the Division at the end of 27 February 1983 and shall issue a certificate to (B) and (D) stating the price payable in respect of such sale.

The liabilities of the Division for this purpose shall include (without limiting the generality of the foregoing) in respect of the employees of the Division all amounts which at the end of 27 February 1983 were due or accruing for or on account of: -

• (a) long service leave, after an employee has been in (B's) employment for more than 5 years;
• (b) annual leave, including any applicable loading;
• (c) sick leave (if (D), as the successor of (B) as employer, will be liable under any relevant award for sick leave prescribed thereunder accumulated during the employee's employment by (B)); and
• (d) any other matter whatsoever,

calculated having regard to the period of employment of each employee of the Division as a proportion of the relevant qualifying period.

Either (B) or (D) may challenge the certificate issued by (accountants) shall issue a new certificate stating the price. If any question cannot be resolved between the officers of (B), (D) and (accountants), the same shall be referred to the President for the time being of The Institute of Chartered Accountants in Australia or his nominee

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acting as an expert not as an arbitrator and his decision shall be final and binding on the question.

4. The price shall constitute an interest free loan from (B) to (D).

5. Notwithstanding the foregoing (D) shall on such sale indemnify (B) against such of the liabilities under the aforementioned lease agreements (which liabilities are and shall be in the audited statement hereinbefore referred to noted as contingent liabilities) as fall due for payment or performance after the date of acceptance of the offer.

6. All costs (including any stamp duty) of or associated with the purchase shall be for the account of (B), except that audit costs will be borne equally between (B) and (D).

7. The purchase shall be deemed to be effective and (D) shall be entitled to the income and shall bear the expenses of the business as from the beginning of 28 February 1983 notwithstanding that possession of the business shall be given and taken from the date of acceptance of the offer by (B)."

5. The accountants proceeded to carry out their duties and by the end of June 1983 certified that as at 27 February 1983 the amount by which the value of the assets exceeded the amount of liabilities was $3,018,310 - in arriving at the figure for liabilities a provision for employee benefits of $108,972 was included ($13,573 under non-current liabilities and $95,399 under current). A deficiency figure of $4,463,210 had also been arrived at by the accountants in relation to C and by offsetting the two amounts B owed A $1,444,900. After discussion some adjustments were made and by telex of 29 August 1983 it was advised that "final agreement has now been reached with (B) in relation to the acquisition" with the net amount due from B being $1,462,357. This amount paid on 16 September 1983.

6. D had previously lodged returns on other than a year ended 30 June basis but this was changed after "acquisition" (name of D also changed) and it lodged a return for the period 1 August 1982 to 30 June 1983 disclosing a taxable income of $275,711. The return also disclosed under "Movements in Reserves & Provisions" that the provision for employees as at 1 August 1982 had been increased by an amount of $108,973 described as "Transfer on Acquisition of Business". Upon assessment the figure of $275,711 returned was adopted in the notice issued on 13 April 1984 but a requisition of the same date stated:

"With reference to the company's return of income for the year ended 30 June 1983 would you please forward the following information as soon as possible:

• (a) The separate amounts of -
  • (i) holiday pay;
  • (ii) sick leave; and
  • (iii) long service leave,

  included in the amount of $108,973 transferred to the company on the acquisition of new business.

• (b) The full name and address of the vendor.
• (c) Whether the parties involved in the sale and purchase of the business were at arm's length. If not an assurance is required from the vendor that no part of the amount of holiday pay transferred in conjunction with the sale has been claimed as a deduction in terms of sub-section 51(1) of the Act."

7. Following a reply of 8 June 1984 in the following terms:

"We refer to your questionnaire dated 13 April 1984 requesting further information on a number of matters contained in the abovementioned taxpayer's 1983 income tax return.

In relation to the details required, we advise as follows:

• (a) The amount of $108,973 transferred to the company on the acquisition of the business by (A) from (B), was comprised of the following amounts:

                                    $
        (a) Holiday pay          95,200
        (b) Sick Leave              200
        (c) Long Service Leave   13,573
                                -------
                                108,973
                                -------
                

• (b) The full name and address of the vendor is:
  • (B)

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• (c) The parties involved in the sale and purchase of the business were operating at arm's length."

an amended assessment was issued on 7 August 1984 to include as assessable income the "amount in respect of holiday pay transferred" $95,200.

8. Objection was taken to this amendment claiming that the amount was not assessable and that the amendment was not authorised by sec. 170. This later claim was abandoned before the Tribunal and the relevant grounds of objection are confined to the following:

"(1) That the said amount of $95,200 (or some greater or lesser amount as may ultimately be determined) is not income for the purposes of section 25 of the Act nor any other section of the Act, and accordingly, is not assessable to income tax under that or any other section of the Act.

(2) That the said amount of $95,200 (or some greater or lesser amount as may ultimately be determined) is a receipt of capital or a receipt of a capital nature, and accordingly, is not assessable to income tax pursuant to section 25 or any other section of the Act.

In amplification of the abovementioned grounds and without limiting the generality thereof we advise that during the year of income the company purchased a business and as a result of the acquisition holiday pay in the amount of $95,200 was transferred to the taxpayer. The amount of holiday pay is clearly an affair of capital and is not a gain arising from the taxpayer's business or a business deal ventured by the taxpayer. Accordingly, the $95,200 should not be included in the taxpayer's assessable income."

9. The relevant sections are 25(1) and 26(j) which provide:

"25(1) The assessable income of a taxpayer shall include -

• (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and
• (b) where the taxpayer is a non-resident - the gross income derived directly or indirectly from all sources in Australia, which is not exempt income.

26 The assessable income of a taxpayer shall include -

• ...
• (j) any amount received by way of insurance or indemnity for or in respect of any loss -
  • (i) of trading stock which would have been taken into account in computing taxable income; or
  • (ii) of profit or income which would have assessable income,

  if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction."

10. Before considering the respective arguments raised it might be appropriate to refer initially to three cases that were discussed in the course of the addresses of counsel. Two dealt with "rates adjustments" and one with a payment by a vendor of an enterprise to the purchaser thereof on account of accrued employee entitlements.

11. In the case of
C. of T. v. Morgan (1961-1962) 106 C.L.R. 517 and
Goldsbrough Mort & Co. Ltd. v. F.C. of T. 76 ATC 4343 the Full High Court and the Supreme Court of South Australia respectively were considering questions relating to adjustments on account of rates on the sale of income-producing properties. In the first case the purchaser "paid" the vendor an amount on account of his share of the rates previously met by the vendor and was claiming a deduction therefor in terms of sec. 51(1). The second case involved the "receipt" by the vendor of the purchaser's share of the rates already met by it which the Commissioner was seeking to tax in terms of either sec. 25(1) or 26(j). It was held by the Full High Court that a deduction was allowable in terms of sec. 51(1) and by the Supreme Court the the amount involved constituted assessable income.

12. The Full High Court at pp. 520-521 set out the opposing sets of considerations - one, inter alia, being it related to capital; the other it being "inherently an outgoing on account of revenue" - and at pp. 521-522 said:

"On the whole the better view appears to be that the apportioned part of the rates does form an allowable deduction from the

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assessable income of the year covering the period to which that part is referable. Not only as a matter of reason and business sense is it an outgoing on account of revenue, but an examination of the grounds on which it is said to be capital and not incurred in gaining the assessable income discloses their inadequacy. In the first place neither under the contract nor under the statutory provisions does the apportioned part of the rates really represent a payment for the land as a profit or income earning subject, that is as a capital asset. The price remains fixed. The payment of the apportioned part is separate and represents nothing but the reimbursement of a charge for an ensuing period of enjoyment, one of a very limited duration. It is not in form or substance part of the consideration for the property considered as a `corpus'. In the next place it is entirely variable with the time of settlement or giving of possession and with the amount paid in respect of a period thereafter by the vendors. It is, in other words, treated as between them as part of the `flow' of outgoings so characteristic of expenditure on revenue account. When you turn to the words of s. 51 `in gaining... the assessable income', no real reason can be seen why a payment made at the beginning of a period in which assessable income is gained should not be regarded as made in gaining the income. We need not apostrophize the word `in' as Lord Birkenhead did the word `then' as `one of infinite finesse, flexibility and variety'
(Lucas-Tooth v. Lucas-Tooth [1921] 1 A.C., at p. 601), but at least we can attribute to it a wide enough scope to include that conception.

No one nowadays would deny that the rates levied on a rent-producing property form an outgoing to be regarded as made in producing or gaining the rents as income. If they are paid or actually borne by the taxpayer, does it matter by whom they are actually paid to the council or water authority? And why should it matter that they are borne by the taxpayer not because he paid them to the rating authority directly but because he reimbursed them, so far as they relate to his period of enjoyment of the rents, to a previous owner of the property? The correct view appears to be that the reimbursement is on account of revenue, not on account of capital, and is made in gaining the assessable income consisting of the rents."

13. In the Supreme Court case Walters J. held the amounts were assessable in terms of both sec. 25(1) and 26(j). In relation to sec. 25(1) his Honour said at pp. 4346-4348:

"Whether or not a receipt is of an income nature or a capital nature has received the attention of the courts on numerous occasions. But on the authorities, I do not think it possible to formulate any fixed rule which would provide a solution to the problem that would be capable of being applied to every case. `Each case must largely depend on its own facts, and the decisions show that the margin is sometimes a narrow one between what in one case has been treated as a [receipt on account of revenue] and what in another case has been attributed to capital' (
Burmah Steam Ship Co. v. I.R. Commrs (1931) S.C. 156, per Lord Blackburn at p. 163). Though the interpretation of the language of sec. 25(1) has given rise to difficulties and differences of opinion, I think I may take as my guide the criterion adopted by Stephen J. in
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4001, where his Honour said (at p. 4009):

• `For the purposes of sec. 25(1) of the Act, the character of a receipt in the hands of the taxpayer is to be determined having regard to all the circumstances of the case.'

And his Honour went on to propound a test to be applied, namely, whether in the circumstances established, the receipt bears `the nature of proceeds of a trade or business and hence [is] assessable income'. In the instant case, I am, of course, foreclosed, in the interpretation of sec. 25(1), from accepting the proposition that because a refund of rates and taxes in one income year happens to be a refund of outgoings on revenue account of a type which has been allowed in earlier years, the adjustment necessarily becomes assessable income within the meaning of sec. 25(1)
(Allsop v. F.C. of T. (1965) 113 C.L.R. 341, 350-351;
H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537, 542-543).

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I am not unmindful of the strictures that have been placed on the use of metaphors in the law, but I nevertheless think that a metaphor used by the Lord President (Lord Clyde) in Burmah Steam Ship Co. v. I.R. Commrs (supra) is apt for present purposes. Bringing that metaphor into play in the circumstances of this case, I think the most useful way of testing the character of the adjustments received by the taxpayer is to have regard to the character of the `hole' that was filled by the payments made. The `hole' made in the taxpayer's profits for the year of income was one involving an expenditure in respect of rates and taxes upon income account - an expenditure related to its `enjoyment of the land or the rents and profits' derived therefrom. As it seems to me, the rates and taxes so paid are to be treated `as part of the `flow' of outgoings characteristic of expenditure on revenue account', and as such are inexorably connected with the profit derived from the business carried on by the taxpayer. Rates and taxes paid out were necessarily thrown against the rents accruing during the year of income and were outgoings in gaining income, for that year, from the rents received from the properties in question. The taxpayer was reimbursed because it had paid those rates, and as a matter of `reason and logic', it was `reimbursed those rates simply because it happened to have paid them' (
F.C. of T. v. Morgan (1961) 106 C.L.R. 517, 520). Payment of the rates and taxes made a `hole' in the taxpayer's profits, and in my view, therefore, it is in accordance with sound accounting principles that the refund should be treated, pro tanto, as filling that `hole'.

It is true that in F.C. of T. v. Morgan (supra), the Court was concerned with the right of a purchaser to deduct from his assessable income the amount paid by him to the vendor on an apportionment of the rates, levied on a rent-producing property, that had actually been paid by the vendor prior to possession being given and taken. The Court held that the purchaser was entitled to claim a deduction of the amount paid on account of the adjustment. Admittedly, the present case has converse features. Even so, it appears to me that the reasoning of the Court in Morgan's case has equal application in deciding whether a payment received by a vendor on adjustment of rates and taxes may properly be treated as a receipt of a revenue nature, or whether it should be regarded as a payment of a capital nature made in fulfilment of a condition attaching to the sale of the subject property. The purchase price is clearly not increased by reason of the apportioned rates being paid to the vendor; the adjustment received cannot be regarded as a component of the purchase price. Unless the receipt of the sum apportioned in the vendor's favour takes the character of a consideration for the acquisition of the capital asset, it seems to me that it cannot be said to be a receipt of a capital nature...

In my view, it is consistent with the reasoning applied in the cases cited and with considerations of reason and logic to treat the adjustments as receipts of a revenue nature and not as receipts of a capital nature; they possess `those attributes ordinarily regarded as those of a transaction of a revenue nature giving rise to income as commonly understood' (Hamblin's case (supra), per Stephen J. at p. 4009). I think the adjustments were received by the taxpayer on a revenue account sufficiently connected with the business which it conducted and that they must be brought into the category of assessable income. I am of opinion, therefore, that the Commissioner was entitled to say that the adjustments were items of revenue falling within sec. 25(1) and to include them in the taxpayer's assessable income."

14. Walters J. said in relation to sec. 26(j) at pp. 4349-4350:

"In the present case, each contract for sale and purchase resulted in the assumption by the purchaser of certain obligations which, but for the transaction, would have rested upon the taxpayer. In terms of the contract, the taxpayer was to be kept secured against, or compensated for, the expense of rates and taxes on the subject property, in so far as the taxpayer might become liable in future to discharge that expense, or in so far as it had already discharged it; the taxpayer was to be held indemnis. In my view, the language of sec. 26(j) may be treated as contemplating an indemnification in respect of loss already

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incurred (
Robert v. Collier's Bulk Liquid Transport Pty. Ltd. (1959) V.R. 280, p. 283;
Melbourne Saw Milling Manufacturing Co. Pty. Ltd. v. Melbourne and Metropolitan Board of Works (1970) V.R. 394, p. 399). Support for the view I take may be found, I think, in the judgment of Kitto J. in
F.C. of T. v. Wade (1951) 84 C.L.R. 105, where the learned Judge, in construing sec. 26(j), held that compensation already paid to a taxpayer, for a loss sustained by the destruction under statutory authority of certain dairy cattle, fell within the ambit of sec. 26(j) and was to be treated as an item on account of revenue for the purposes of ascertaining assessable income...

By application of the principles enunciated by Kitto J. in Wade's case (supra), it seems to me that the purpose of the amount received by the taxpayer on adjustment of the rates and taxes was to compensate it for the loss of the `enjoyment of the fruits of the property', in respect of which the rates and taxes were paid. The receipt had the effect of indemnifying the taxpayer and of replacing in its hands something that it had lost on revenue account. I am satisfied that if that was the ultimate purpose of the payment, it is proper to treat it as an indemnification of the taxpayer for an expense already incurred. Looking at the reason why the apportioned amounts were received by the taxpayer, it is my opinion that the character of each receipt was a receipt `by way of indemnity' and that the words of sec. 26(j) are wide enough to cover that receipt."

15. The case of
F.C. of T. v. Foxwood (Tolga) Pty. Ltd. 81 ATC 4261; (1980-1981) 147 C.L.R. 278 concerned the sale of a business and amounts paid by the seller (Foxwood (Tolga)) to the purchaser in respect of transferred employees' accrued entitlements. The basic facts therein and the differing views advanced are conveniently set out in the reasons of Mason J. at ATC pp. 4265 and 4267; C.L.R. pp. 287-288 and 290 respectively:

"On 29 June 1976 the taxpayer entered into an agreement with Foxwood whereby it agreed to sell to Foxwood, with effect from 30 June 1976, all its undertaking and business (subject to an immaterial exception relating to shares in related companies). Clause 25 of the agreement provided:

• `The purchaser shall take over all the Vendor's employees employed in the Vendor's business on the 30th June, 1976 and on and from that date the Purchaser shall be liable to make holiday, sick leave and long service leave payments accruing or owing before or after that date provided that the Vendor shall pay to the Purchaser on the 30th June, 1976 an appropriate amount as shall be determined by C.E. Smith & Co. as the employees' accrued entitlement for long service leave and holiday and sick pay.'

The amount determined as appropriate, $11,658.78, was paid by the taxpayer to Foxwood on 30 June 1976. The amount in issue, $8,897, represented the total of the amounts which the taxpayer would have been obliged to pay to its employees in respect of long service leave ($2,913) and annual holiday entitlement ($5,984) if their employment had terminated on 30 June 1976. No claim for a deduction was made in respect of sick leave.

The competing characterizations suggested as applicable to the payment are:

• 1. That it was made for the purpose of discharging a contractual obligation undertaken in, and for the purpose of, disposing of a capital asset. It was really an adjustment of the purchase price. On this view the payment was made, not in the course of operations directed to the production of assessable income, but because the taxpayer had decided to cease production of assessable income by the hiring out of its employees.
• 2. That the object sought to be achieved by the payment was the removal from the taxpayer to the purchaser of the burden of the taxpayer's obligations to its employees in respect of annual and long service leave on account of past periods of service. These obligations arose from the day-to-day business operations of the taxpayer though their time of crystallisation would vary according to circumstances. Thus the outgoing was necessarily incurred in carrying on the business of producing assessable income, even if this was assessable income of a previous year (see

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  A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1975) 132 C.L.R. 175)."

His Honour also found that under the appropriate State law each employee upon the termination of his employment was entitled to be paid his accrued holiday pay but not in respect of long service leave.

16. The Full High Court held that the amount of $5,984 "holiday pay" was allowable but not the $2,913 "long service leave". Gibbs C.J. said at ATC pp. 4264-4265; C.L.R. pp. 285-287:

"The character of an outgoing `can be determined only in relation to the object which the person making the expenditure has in view':
W. Nevill and Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290, at p. 301. The question `What was the object of the expenditure?' must be answered from a practical and business point of view: see the statement of Dixon J. in
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 72 C.L.R. 634, at p. 648, which has often been cited and which I discussed in
F.C. of T. v. S.A. Battery Makers Pty. Ltd. at ATC p. 4419; C.L.R. p. 659. Although the payment to the purchaser of the amount payable to the employees for holiday pay would not have relieved the taxpayer of his liability to the employees if the purchaser, in breach of its obligation to the taxpayer, failed to pay the employees, there is no reason to suppose that the purchaser would or did fail to carry out its obligations. From a practical, although not from a legal, point of view the payment discharged the obligation of the taxpayer to the employees. It would be too narrow a view to hold that the object of the payment was to enable the purchaser to pay the employees; the object, revealed by cl. 25 of the contract, was to discharge the obligation of the taxpayer to the employees by paying the requisite amount to the purchaser and obliging him to pay the employees. The payment therefore had the same character as a payment made directly to the employees would have had. It should be emphasised that there is no suggestion that the transaction was a mere sham, and no evidence that it was carried out with a view to evade or avoid tax.

For these reasons, if the obligation to make a payment in respect of holiday pay had arisen on 30 June 1976, the amount of $5,984 would have been deductible. In my opinion the fact that, on the assumption made, the obligation did not arise until 9 July 1976 makes no difference. As I have said, the outgoing was incurred on 30 June 1976 when the payment was made. In the circumstances of the present case, the object and character of the payment were not altered by the fact that it was made nine days before the obligation legally arose. From a practical point of view, the taxpayer was entitled to regard the services of its employees as having been terminated on 30 June, and to consider that it was bound to discharge its obligations to them as at that date.

For these reasons the payment of $5,984 in respect of holiday pay was an allowable deduction under sec. 51(1).

The position with regard to the payment of the amount said to be in respect of long service leave is however different. The effect of the contract for the sale of the business, and the transfer of the services of the employees to the purchaser, was that the taxpayer was not liable, and never could become liable, to pay anything to his former employees in respect of long service leave. It is impossible to say that the object of the payment of $2,913 was to discharge a liability which did not and never could exist. By this part of the payment the taxpayer made a contribution to assist the purchaser of the business to discharge obligations which would be expected to bind the purchaser in the future. It was not an unreasonable provision to make in a contract for the sale of the business. A payment of that kind was not incidental or relevant to the gaining or producing of the taxpayer's income or clearly appropriate to or adapted for that purpose; it was incidental and relevant to the sale of the business."

17. At ATC p. 4269; C.L.R. pp. 293-294 Mason J. said:

"Here, our task is to characterise a payment which has in fact been made. The situation is one in which there is an outgoing; the problem is to ascertain its character.

The payment in so far as it related to holiday pay is in my opinion indistinguishable from Morgan. It is, however, quite

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distinguishable from
Peyton v. F.C. of T. (1963) 109 C.L.R. 315, at pp. 320-321, where the payment was made, not in gaining or producing assessable income, but in the course of, and for the purpose of, disposing of a capital asset, the payment being made in respect of an amount for repairs as a condition of the lessor giving his consent to a transfer or parting with possession of the lease. It is therefore correct to characterise the payment for holiday pay as one made for the purpose of removing from the taxpayer the burden of its obligation to employees in respect of annual holiday pay on account of past periods of service and is within sec. 51 because it is an expense incurred in the gaining or producing of assessable income.

However, the very circumstance which enables me to conclude that the payment in respect of holiday pay is an allowable deduction is absent in the case of the payment made in respect of long service leave. As we have seen, the liability, if any, to arise in respect of long service leave was a liability of the purchaser, the inchoate liability of the taxpayer having terminated in consequence of the disposition of the business for which provision was made by the contract and the termination of the employees' services as contemplated by the contract. The payment made to the purchaser in respect of long service leave was therefore a contribution made in respect of its liability to accrue in the future. In no sense can it accurately be described as a payment made for the purpose of discharging a liability of the taxpayer. Consequently, the payment in respect of long service leave is not an allowable deduction."

whilst Wilson J. commented at ATC pp. 4269-4270; C.L.R. pp. 295-296.

"In my opinion, the important consideration touching the payment by the taxpayer of a sum for accruing long service leave is that the effect of sec. 17(7)(b) of the Queensland statute was to extinguish completely any liability of the taxpayer in respect of long service entitlements of the transmitted employees. By virtue of the Act, the purchaser of the business became solely responsible for that liability. This being so, the payment necessarily assumes the character of an adjustment to the purchase price on the sale of the taxpayer's business. It must therefore represent expenditure on capital account, and the taxpayer's claim to a deduction pursuant to sec. 51(1) must fail.

The position with respect to holiday pay is different. I approach the problem on the basis that the employees ceased to work for the taxpayer at the close of business on 30 June 1976. It may be true enough that they did not know it at the time. But it was a most unusual situation. My conclusion rests on the particular circumstances, including the close connection between the vendor and the purchaser, the terms of the agreement of 29 June, the fact that the purchaser paid the workers their wages from 1 July and their subsequent written acceptance of the arrangement. Until 30 June the taxpayer would not have been liable for holiday pay unless and until a worker proceeded on leave or had his employment terminated. However, when a termination of the employment eventuated on 30 June, the workers' entitlement under the award to holiday pay was crystallised. Strictly speaking, had they but known it, the workers could have demanded that they be paid there and then. However, the taxpayer agreed with the purchaser that provided it was willing to assume the taxpayer's liability to its employees in this respect then the taxpayer would pay to it on 30 June the amount in which by reason of the termination it had then become liable. This formed part of the arrangement which the workers subsequently accepted. It was no doubt a sensible arrangement, because the workers could reasonably have preferred to actually take their holidays later in the year rather than to receive their entitlement partly in cash. In any event, the fact that the taxpayer made a payment to the purchaser in respect of holiday pay on 30 June is irrelevant to the deductibility of the amount due to his workers in that regard on the termination of their employment. The outgoing was actually incurred on that date, whether or not it was actually paid:
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492, at p. 507. Likewise it is immaterial whether by making the payment to the purchaser the taxpayer discharged his liability to its employees.

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On this view of the circumstances, it seems to me that the payment of $5,984 on 30 June bore the character of an outgoing necessarily incurred in carrying on a business for the purpose of gaining assessable income and was therefore deductible under sec. 51(1)."

18. It will be noted that in relation to the long service leave aspect only Wilson J. referred to the capital attribute of the payment directly. Gibbs C.J. said it "was incidental and relevant to the sale of the business" - not "to the gaining or producing of the taxpayer's income" - whilst Mason J. said it was not "a payment made for the purpose of discharging a liability of the taxpayer".

19. It will be noted that the present application is, in one sense, the converse of Foxwood (Tolga) Pty. Ltd. Here the applicant was the purchaser of a business (rather than a vendor) whilst it "received" (rather than "paid") the benefit of accrued employees' entitlements. However, in another sense, the situation is quite different in that Foxwood (Tolga) Pty. Ltd. actually paid an amount to the purchaser, whereas here there was no such payment by the vendor to the purchaser. It is in this "difference" that the issues involved largely arise.

20. Counsel for the applicant argued that the converse of Foxwood (Tolga) Pty. Ltd. did not exist here because there had been no payment to it by the vendor - if there had been a payment then on the basis of Morgan it could be assessable - nor any crediting etc. that could constitute a derivation of assessable income. What the facts showed was the purchase of a business for a price payable as set out in an auditor's certificate. This price was to be arrived at in a particular manner but that having been calculated and accepted such price could not be gone behind in order to dissect it so as to say a higher amount was the "cost" of certain assets and other amounts were "credits" allowed to the purchaser by the vendor in respect of that "cost". In support reference was made to
McLaurin v. F.C. of T. (1960-1961) 104 C.L.R. 381 and
Allsop v. F.C. of T. (1965) 113 C.L.R. 341.

21. For the Commissioner counsel argued that what had been acquired by the applicant was not a business but rather assets which were paid for, inter alia, by the assumption of liabilities including the accrued employees' entitlements. Accordingly whilst no amount was paid to the applicant in cash there had been a set off (Spargo's case; In
re Harmony & Montague Tin and Copper Mining Co. (1873) L.R. 8 Ch. App. 407 per Hellish L.J. at p. 414). Such set off was an effective "payment" - relieved applicant of liability to pay full amount for assets - and accordingly was assessable in terms of sec. 25(1). Alternatively it was assessable under sec. 26(j) as relating to a future diminution of profits and going to fill that future "hole" - Burmah Steam Ship Co. v. I.R. Commrs. (1931) S.C. 156 and
Carapark Holdings Ltd. v. F.C. of T. (1966-1967) 115 C.L.R. 653. In relation to McLaurin's case it was said the present position was different in that it was not an overall compensation figure to meet all claims but rather a net amount where the components of the calculation thereof could be looked at (
The National Mutual Life Association of Australasia Ltd. v. F.C. of T. (1958-1959) 102 C.L.R. 29).

22. In reply counsel for the applicant agreed that what was purchased were the assets of the business but contended they had not been purchased for a net amount but for precise amount albeit calculated in a particular manner. This calculation and the assumption of liabilities in terms of the contract could not result in it being said the assumption of liabilities was the same as a crediting. The position would be different if there was a particular price for the assets and a further amount added thereto an account of liabilities to be "taken over" but that was not the present situation. Unlike Goldsbrough Mort & Co. Ltd. (supra), where there was a fixed price and the adjustment was not "a component of the purchase price", here the price was a "reduced" figure and the liability was "taken" into account in the calculation of that figure. In relation to sec. 26(j) counsel said that whilst a liability had been assumed no amount had been received for such assumption so that the requirements of the section had not been met. He also left open the question of whether if an amount had been received it was "in respect of any loss or outgoing which is an allowable deduction".

23. Dealing firstly with the question of "dissection" McLaurin (supra) concerned a claim for unliquidated damages arising out of a fire which commenced on railway property. The Commissioner for Railways had the advice

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of a valuer who compiled a list of items involved and a settlement took place on the basis of the end result of this list. However McLaurin never was told of the details on the list. It was held by the High Court that the sum received could not be dissected and at p. 391 the Court said:

"The submission neither accords with fact nor squares with legal principle. It does not accord with fact, for an account of the manner in which Mr Cameron reached his total is only an account of his reasons for the recommendation he made to the Assistant Solicitor for Railways; and even though those reasons may have been adopted by that officer, or even by the Commissioner for Railways himself, the offer that was made was not of a total of itemized amounts, but was of a single undissected amount. And in point of law it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by a consideration of the uncommunicated reasoning which led the payer to agree to pay it.

It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly:
Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 C.L.R. 382, at p. 466;
Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 C.L.R. 47, at p. 55; The National Mutual Life Association of Australasia Ltd. v. Federal Commissioner of Taxation (1959) 102 C.L.R. 29, at p. 50. But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, cf.
Carter v. Wadman (1946) 28 Tax Cas. 41, or are otherwise ascertainable by calculation: cf.
Tilley v. Wales (1943) A.C. 386, it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole:
Du Cros v. Ryall (1935) 19 Tax Cas. 444, at p. 453."

24. In Allsop (supra) the appellant took action to recover permit fees wrongly enacted under the State Transport (Co-ordination) Act. Following negotiations a deed of release was executed and in terms of the deed Allsop accepted £37,500 "in full satisfaction and discharge of all actions suits claims and demands for the recovery of the moneys as claimed to have been paid and all moneys and expenses incurred by the appellant in and about the prosecution of the said action and in full satisfaction and discharge of all actions suits claims and demands which the appellant might then have or at any time thereafter have" (per Barwick C.J. and Taylor J. at p. 349). It was held that the amount "was an entire sum paid by way of compromise of all these claims and no part of it can be attributed solely to a refund of the fees paid by the appellant for permits" (at p. 351). Windeyer J. said at p. 352:

"I agree that the appellant is not liable to income tax in respect of the receipt by him of the sum of £37,000 in question. He had commenced an action to recover from the Government of New South Wales the sum of £54,868 as money had and received to his use. He took £37,000 not simply in satisfaction of his claim in that action but in consideration of his release by deed of a variety of claims that he had, or might be thought possibly to have, against the Government. It does not appear from the material before us that the sum of £37,000, or any definite part of it, was computed, paid and received as a refund of particular amounts that had been paid by the appellant for road charges and which had been allowed as deductions in the assessment of his taxable income."

25. With respect to the argument of counsel for the applicant it is thought the present situation is distinguishable on the facts. Here, although reference is made to the price stated in a certificate, it is clear that the parties were to be aware of the audited statement of assets and liabilities upon which the price was based and to be able to challenge individual figures appearing therein if considered appropriate. It is not a case where there is "uncommunicated reasoning" nor one where the sum was not computed in a particular manner. In fact there were some adjustments made to the original

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figure of $1,444,900 (para. 5) and these were in respect of particular individual items such as security deposits and outstanding cheques. In this regard Davies J. found in Foxwood (Tolga) Pty. Ltd. when the matter was before the Full Federal Court (80 ATC 4096 at p. 4108) that an apportionment should be made because "the sum was not a single indivisible sum but the product of calculations made by C. E. Smith & Co. with respect to its elements". Accordingly the Tribunal rejects on the facts the proposition that no "dissection" is possible in the present case.

26. However even though "dissection" shows that, in addition to acquiring assets, the applicant was undertaking a "liability" of $95,200 in relation to a particular matter does it follow that this "liability" constitutes assessable income either as "gross income derived" in terms of sec. 25(1) or as an "amount received" for sec. 26(j) purposes?

27. In C. of T. v. Morgan (supra) and Goldsbrough Mort & Co. Ltd. v. F.C. of T. (supra) the rationale of the two converse situations can readily be appreciated. There were properties sold at particular prices (as specified in contracts of sale) and upon settlement "adjustments" were necessary for purchaser/vendor proportions of paid/unpaid rates. The result of such adjustments was that the purchaser "paid" this proportion of rates paid by the vendor whilst the vendor was reimbursed for the rates paid by him applicable to the purchaser's period of ownership. Accordingly the purchaser was entitled to a deduction in respect of his period of income-producing ownership whilst the vendor was assessable in respect of the reimbursement for the period his income-producing ownership had ceased. On the basis of this rationale if the rates were completely outstanding as at that date of completion the vendor would "allow" for his share of these rates and, as this share related to his income-producing ownership period, be entitled to a deduction therefor. On the other hand the purchaser who paid the full amount would presumably only be entitled to deduction under sec. 51(1) for the proportion applicable to the period of his ownership. Of course, if either the vendor or purchaser did not or was not to use the property for income-producing purposes then the appropriate share would not be allowable. Thus the assessability and deductibility of the rates "adjustments" depends on whether the appropriate share relates to income-producing activities of the party concerned. Is the rationale of F.C. of T. v. Foxwood (Tolga) Pty. Ltd. (supra) the same?

28. Foxwood (Tolga) Pty. Ltd. was entitled to a deduction for its payment in respect of holiday pay because it was liable to the employees therefor on the termination of their employment by reason of the sale of its business and the payment to the purchaser from a practical point of view discharged that obligation which had been incurred in terms of the section. However there was no such liability for long service leave payments to its employees on termination and a deduction was not allowable because "it was incidental and relevant to the sale of the business" (per Gibbs C.J.) or had "the character of an adjustment to the purchase price on the sale of the taxpayer's business" (per Wilson J.). Thus the principle seems to be the same as in the rates cases - if it is in discharge of a liability incurred in the course of carrying on business to gain assessable income it is allowable but if there is no liability incurred to be discharged then it is not allowable. How then does this common principle affect the "purchaser"? Although it has received payment and has to pay in due course the employees it has taken over a similar amount, such payment is not in respect of any holiday pay liability accrued by the employees whilst engaged in the income-producing activities of the purchaser - rather it is a liability arising from the vendor's income-producing activities - and it may be arguable that it is not within the terms of sec. 51(1).

29. Such a consideration may be the reason why counsel for the applicant merely said in address that, if a dissection was possible, the amount could be assessable and, in reply, left open the issue of whether the payment to the employees would be an allowable deduction. As counsel for the Commissioner did not deal specifically with this issue - by referring to the payment going to fill a future "hole" in profits he "assumed" it would be deductible - it is not unfair to state that the Tribunal has had little assistance on what it sees as the determinative question i.e. having found dissection is possible. Nor did counsel specifically refer to the provisions of sec. 51(3).

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30. Section 51(3) was enacted by Act No. 171 of 1978 to apply, inter alia, to assessments in respect of the year of income commencing on 1 July 1977 (other than those made before 28 September 1978) and provides:

"(3) A deduction is not allowable under sub-section (1) in respect of long service leave, annual leave, sick leave or other leave except in respect of an amount paid to the person to whom the leave relates or, where that person is deceased, to a dependant or personal representative of that person and, for the purposes of that sub-section, the amount paid shall be deemed to be a loss or outgoing incurred at the time when the payment is made."

As a result of these provisions a vendor like Foxwood (Tolga) Pty. Ltd. is no longer entitled to a deduction in respect of payments it makes to a purchaser to cover its liability to its ex-employees for accrued holiday pay and, unless the purchaser is so entitled, no one receives a deduction. Certainly the payment to the employees by the purchaser would be deemed to be a loss or outgoing incurred at the time of payment but would it be one necessarily incurred in carrying on a business by the purchaser and one which is not of capital or of a capital nature? It is thought that the answer should be in the affirmative.

31. The reason for so thinking is that it is difficult to imagine anything more related to the carrying on of a business for the purpose of producing assessable income than payments to employees of that business. As the old case of
Stockvis v. F.C. of T. (1930) 1 A.T.D. 9 demonstrates costs in relation to seeking out, engaging and bringing employees to Australia are allowable. When a business is acquired the employees have a fresh employment with the purchaser and one of the implied terms of employment (where the purchaser receives payment) would be the entitlement to holiday pay calculated as from particular dates - being those applicable to commencement with the vendor. Any payment of holiday pay when the employee takes his holiday would be in pursuance of his "contract" of employment and would satisfy the terms of the section.

32. It follows that the payment by the purchaser to its employees would be allowable and that there is a common principle running through the cases which results in the dissected amount being assessable in terms of sec. 25(1) and/or sec. 26(j). It is recognised that in one sense such a result is inequitable - previously both vendor and purchaser received deductions (double dipping prevented by sec. 51(3)) whilst now the vendor receives no deduction and the purchaser no deduction in effect (deduction offset by amount received) - but such can only be said of the vendor who has not only received less for his business but has lost its deduction. The purchaser remains unaffected and it would be unjust if, having received a reduction in the price paid for the business, the purchaser could also receive an "unfettered" tax deduction in relation to such reduction. Of course justice has only a limited role in the interpretation of taxation statutes but it is comforting not to have to reach an unjust result.

33. For the above reasons the Tribunal affirms the decision of the Commissioner upon the applicant's objection to its assessment for the year ended 30 June 1983.