COLES MYER FINANCE LIMITED v FC of T

Judges:
Sweeney J
Northrop J
Wilcox J

Court:
Full Federal Court

Judgment date: Judgment handed down 5 February 1991

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Sweeney, Northrop and Wilcox JJ

It is an indication of the scale of inflation and interest rates in recent years that this case comes to the Court at all. For, although - not unusually - the case involves a claim to deduct certain expenditure from a taxpayer's taxable income, it is - most unusually - common ground between the taxpayer and the Commissioner of Taxation both that the expenditure was in fact incurred and that it is deductible from the taxpayer's taxable income. But the parties are in dispute as to the taxation year within which the deduction should be allowed.

The background facts

The matter comes to the Court by way of a Special Case stated by the Administrative Appeals Tribunal. The Tribunal had before it an appeal by Coles Myer Finance Limited (``the applicant'') against an amended assessment made by the Commissioner relating to the taxation year ended 30 June 1984. Although the Special Case set them out in greater detail, the salient facts may be shortly stated.

As its name suggests, the applicant carries on business as a financier to the Coles Myer Group of Companies. It has done so since 1981. For the purposes of that business it raises finance from various sources, including non-related companies. To this end, during the year ended 30 June 1984 the company drew, and sold at less than their face values, both bills of exchange and promissory notes. The total face values of the bills of exchange and promissory notes drawn by the company during the year were $354,000,000 and $140,000,000 respectively. The majority of both the bills of exchange and promissory notes were drawn and paid in the relevant financial year. No question arises in this case about those bills or notes. But a significant proportion were outstanding at 30 June 1984. This case is concerned with them. Specifically, it appears from the Special Case

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ATC 4089

that bills of exchange having a face value of $70,000,000 were then outstanding, they having been previously sold by the applicant for $67,624,421. The face value of the outstanding promissory notes was $40,000,000, they having been sold for $37,640,106. In its taxation return for the year ended 30 June 1984 the applicant claimed to deduct the difference between the face values and the selling prices - $2,375,579 in the case of the bills of exchange and $2,359,893 for the promissory notes. The Commissioner disallowed that claim, on the basis that no relevant loss or expenditure was incurred until the securities were paid out in the following taxation year. The applicant objected to the 1984 assessment, contending that the relevant loss or expenditure was incurred when the company drew the bills and notes; because it then incurred liability to pay the full face value. The Commissioner disallowed the objection and the matter was referred to the Administrative Appeals Tribunal.

The Special Case sets out the procedures adopted in relation to both the bills of exchange and the promissory notes. Each of the bills provided for a relatively early maturity date, the maximum period until maturity being 180 days. Immediately after each bill was drawn, the applicant had it accepted by a bank. Upon the same day, the bill was sold to a financial institution or investment company at a discounted price; the difference between the face value of the bill and the discounted price representing, of course, the cost to the applicant of obtaining the finance. In many cases the bills passed through several hands before maturity date, when they were paid out by the applicant at face value. A similar procedure was followed in relation to the promissory notes, except that in this case there was no acceptance of liability by a bank. All the notes bore relatively early maturity dates. They were sold at discounted prices to financial institutions or investors and were redeemed on the date of maturity by the applicant paying to the holder the face value of the note.

The questions in issue

Against that factual background, it is convenient now to set out the two questions asked in the Special Case:

``First question

On the facts stated in this special case does the amount of $2,375,579 referred to in paragraph 6 below or some other and what amount constitute, within the meaning of section 51(1) of the Income Tax Assessment Act 1936, a loss or outgoing incurred by the applicant -

• (a) in the year of income ended 30 June 1984?
• (b) in the year of income ended 30 June 1985?
• (c) partly and to what extent in the year of income ended 30 June 1984 and partly and to what extent in the year of income ended 30 June 1985?

Second question

On the facts stated in this special case does the amount of $2,359,893 referred to in paragraph 7 below or some other and what amount constitute, within the meaning of section 51(1) of the Income Tax Assessment Act 1936, a loss or outgoing incurred by the applicant -

• (a) in the year of income ended 30 June 1984?
• (b) in the year of income ended 30 June 1985?
• (c) partly and to what extent in the year of income ended 30 June 1984 and partly and to what extent in the year of income ended 30 June 1985?''

As will be apparent from the relevant money amounts, question 1 deals with the cost of the bills of exchange and question 2 with the promissory notes.

Section 51(1)

Each question turns on the application to the facts of s. 51(1) of the Income Tax Assessment Act 1936, which reads as follows:

``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

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ATC 4090

Critical to the present case is the phrase, in s. 51(1), ``losses and outgoings... incurred''. The meaning of this phrase has been considered by the High Court of Australia upon a number of occasions. In
FC of T v. James Flood Pty Ltd (1953) 88 CLR 492 at pp. 506-507 Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ made this comment about the phrase:

``These words perhaps are but little more precise than the word `established' or the expression used above `definitively committed'. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible. But it is certainly true that it is not a matter depending upon `proper commercial and accountancy practice rather than jurisprudence'. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by s. 51(1) but it cannot be substituted for the test.

To repeat what has been said before in relation to an analogous provision in the Act of 1922-1934: `To come within that provision there must be a loss or outgoing actually incurred. `Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected.':
New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 C.L.R. 179, at p. 207.''

The issue in James Flood was whether an employer was entitled to deduct under s. 51(1) the value of provisions which it had made for employees' holiday pay, not yet accrued due. In a subsequent case,
Nilsen Development Laboratories Pty Ltd & Ors v FC of T 81 ATC 4031; (1981) 144 CLR 616, the Court considered the position where leave was due but not yet taken. Once again, deductibility was denied. At ATC pp. 4034-4035; CLR pp. 623-624 Barwick CJ, with whom Mason, Aickin and Wilson JJ agreed, said:

``Granted that exhaustive definition of what may be denoted by the word `incurred' in sec. 51(1) may not be possible, there can be no warrant for treating a liability which has not `come home' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham's language in
Emu Bay Railway Co. Ltd. v. F.C. of T. (1944) 71 C.L.R. 596 at p. 606 clearly enough indicates that to satisfy the word `incurred' in sec. 51(1) the liability must be `presently incurred and due though not yet discharged'. The `liability' of which Sir John speaks is of necessity a pecuniary liability and the word `presently' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investments Ltd. v. F.C. of T. [(1938) 61 C.L.R. 179] which presently needs emphasis is that the word `incurred' in sec. 51(1) `does not include a loss or expenditure which is no more than pending, threatened or expected': and I would for myself add `no matter how certain it is in the year of income that that loss or expenditure will occur in the future'.''

At ATC p. 4037; CLR p. 627 Gibbs J, with whom Stephen J agreed, spoke of the necessity for a ``presently existing liability''. He went on to hold that this was not the situation in the case at bar:

``The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or

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ATC 4091

a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing `incurred' within sec. 51(1).''

There is, in the present case, no question of an unascertained quantum of liability, cf.
RACV Insurance Pty Ltd v FC of T 74 ATC 4169 at p. 4177; (1975) VR 1 at pp. 8-9 and
Commonwealth Aluminium Corporation Ltd v FC of T 77 ATC 4151 at p. 4160; (1977) 32 FLR 210 at p. 223. The amount payable upon their maturity under each of the bills and promissory notes became precisely known at the time when they were drawn. Nor does it matter, if there was a present liability within a particular taxation year, that the applicant's liability might have subsequently been relieved by waiver or some other supervening event: see
Ogilvy & Mather Pty Ltd v FC of T 90 ATC 4836 at p. 4845. The critical question is whether, within the 1984 taxation year, the applicant was under a present liability to pay out the bills and promissory notes, as distinct from being in a position that a liability would certainly arise in the future. To adopt the words of Gibbs J in Nilsen, the question is whether or not there was ``an accrued obligation'' to make a payment.

In addressing this question, it is desirable to consider separately the bills of exchange and the promissory notes. There is a variation between the legal incidents of these two forms of security.

The bills of exchange

The parties agree that each of the relevant bills of exchange was an ``accommodation bill''. An accommodation bill is a bill signed by an ``accommodation party'', as that term is used in s. 33 of the Bills of Exchange Act 1909. That section reads:

``33(1) An accommodation party to a bill is a person who has signed a bill as drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.

33(2) An accommodation party is liable on the bill to a holder for value; and it is immaterial whether, when such holder took the bill, he knew such party to be an accommodation party or not.''

The ``accommodation party'', in relation to each bill, was the bank which accepted it. In each case the bill was accepted for the accommodation of the applicant, so the applicant came under an obligation of indemnity. The terms of that obligation are not controversial. Byles, ``Bills of Exchange'', 26th ed at p. 264 says:

``A party who procures another to lend his acceptance thereby engages himself to take up the bill or else within a reasonable time before the bill becomes due to provide the accommodation acceptor with funds for so doing or, lastly, to indemnify the accommodation acceptor against the consequences of non-payment.''

The reason for this obligation was explained in a note in Riley, ``Bills of Exchange in Australia'', 3rd ed at p. 89; viz that ``(t)he contract between the accommodation party and the accommodated party is that the latter will be considered as the real acceptor of the bill...''.

In the present case, therefore, upon the issue of the various bills of exchange, the applicant came under an obligation, as against the accepting bank, to take up the bill itself before or at maturity, to pay to the accepting bank the funds necessary to enable it to discharge the bill at maturity or, failing either of these courses, to indemnify the bank against the loss that it incurred in paying out the bill from its own funds. Counsel for the applicant argue that it should therefore be held that, as from the date of drawing the bill, their client was under a present liability in respect of its discharge, so that the cost thereof was expenditure incurred in the taxation year within which the bill was drawn.

In putting this argument counsel rely heavily upon the High Court decision in
KD Morris & Sons Pty Ltd (in liq) v Bank of Queensland Ltd (1980) 146 CLR 165. That case arose out of an agreement between the parties under which the bank agreed to provide a $1,000,000 commercial bill facility whereby the company would draw bills which the bank would accept, and which would then be sold at a discount through a merchant banker. Upon maturity of each bill, the bank would pay it out, using moneys provided by the company and substantially obtained by the issue and sale of a fresh bill. After provisional liquidators were

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ATC 4092

appointed, this process continued and the question arose whether the moneys finally owing to the bank were part of the costs and expenses of the liquidation, and so required to be paid in priority to all other unsecured debts. By majority (Stephen, Wilson and Murphy JJ, Mason and Aickin dissenting), the High Court held that they were not.

The issue in KD Morris is quite different from that in the present case. But, in the course of their reasons for judgment, some members of the Court made references to the nature of the company's obligation to the bank; and the present applicant places weight upon those passages. Thus, at p. 174, Stephen and Wilson JJ said this:

``Once it availed itself of the facility the Company also became subject to a continuing obligation. That obligation was to put the Bank in funds in respect of the Bank's payment of bills on their maturity. Whether, as a matter of interpretation, the Company's obligation was to do this on each occasion by rolling over bills or whether it was free at any time to discontinue reliance upon replacement bills, instead putting the Bank in funds from other sources, does not matter. What is significant is that, so long as the Company had bills outstanding which the Bank had accepted, as it in fact had at all times, this obligation to the Bank subsisted. It was not a contingent liability but an existing liability, which required the making of a series of payments at particular dates, dictated by the cycle of 180 days fixed by the bills. Once the facility was availed of by the Company it was inevitable that, either at the end of its five year term or upon the sooner ending of the facility, the Company would become presently indebted to the Bank in respect of the latter's payment of bills on maturity. This happened in 1976 but would in any event have occurred in 1978 had the term of the facility not been extended beyond its initial term of five years.

So long as the Company continued, as it in fact did, to use the roll over mechanism to discharge its periodic obligation to the Bank it was continually subject to this liability. When, during the 180 day cycle, the date arrived for it to put the Bank in funds, the liability became a present liability calling for present performance. Otherwise the liability was a present liability but calling for performance only in the future. Performance of it on the occasion of a roll over did not bring the continuing liability to an end because, the facility still being availed of, there were necessarily bills still outstanding in respect of the retirement of which, pursuant to the terms of the arrangement, the Company was bound to put the Bank in funds.''

This particular passage must be read in its context, as a discussion of the effect of the continuing facility agreement: see the preceding page of the report. But their Honours went on to discuss the position which would arise without a facility agreement:

``Had the Bank been only a casual acceptor of the Company's bills, bound by no agreement to accept them and only doing so in each case as an isolated transaction, there would be no continuing liability. Instead there would be a series of unconnected relationships whereby the Bank became surety for the Company for particular accommodation bills and the Company assumed a liability to the Bank accordingly, which liability would be discharged when the Company put the Bank in funds to retire the bills on maturity. The acceptance of each new bill would give rise to a fresh liability.''

Aickin J, with whom Mason J agreed, dealt at some length with the question whether the liability incurred by the company arose under the facility agreement or by reason of the drawing of the bills themselves. At p. 193 his Honour disagreed with the proposition ``that what the trial judge called the `contingent obligation' did not arise on the bills themselves''. After referring to several authorities, Aickin J expressly stated, at p. 198, that ``(t)he obligation arose from the drawing and accepting of the bills'', rather than the facility agreement. His Honour then went on to deal with the suggestion that this obligation was merely contingent. At p. 200 he said:

``The liability to indemnify the Bank was not contingent except in the sense that, if a bill were not presented, there would be no occasion for indemnification. Once the bills were presented the Bank was obliged to discharge its liability to the holders, and the

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ATC 4093

obligation on the Company to indemnify it arose, unless it had been discharged by the provision of the full face value to the Bank in advance.''

At p. 202 Aickin J added this:

``The liability of the Company must depend on what was done from time to time under the agreement and not upon the agreement itself and what was done on each occasion must stand on its own feet as a separate drawing on the bill facility giving rise to obligations related to those bills only. It was thus the bills themselves which gave rise to the periodic liabilities of the Company and not the making of the agreement. The liability of the Company was not dependent upon any contingency once the bills had been discounted. On the Bank paying each bill on presentation, the liability to indemnify arose by reason of the inherent characteristics of an accommodation bill.''

Counsel for the applicant ask us to read these passages as indicative of the view that an accommodated party comes under a present obligation to pay out the bill immediately upon its acceptance by the accommodation party. Counsel for the respondent contest this interpretation of the judgments. They point out, accurately, that the issue dividing the High Court in KD Morris was whether the company's liability arose by virtue of the facility agreement or the drawing of particular bills. They say that this was an issue remote from that involved in the present case and that their Honours were not concerned to determine whether the obligation created by the acceptance of a bill was a present obligation to pay. They point to Stephen and Wilson JJ's description of the bank as ``surety'' for the company and rightly say that this is a familiar description of the role of an accommodated party: see Chalmers on ``Bills of Exchange'', 13th ed at p. 196 and
Re Oriental Commercial Bank; Ex parte European Bank (1871) LR 7 Ch App 99.

Counsel submit that the accepted rule is that, in the absence of an express agreement to the contrary, a debtor incurs no liability to indemnify a surety until the surety has paid out the debt. They refer to
Wren v Mahony (1972) 126 CLR 212 and ``Halsbury's Laws of England'', 4th ed, vol 20, pp. 173-174. Under these circumstances, say counsel, it would be unreasonable to construe the judgments in KD Morris as indicating that an accommodated party, who had made no special agreement with the accommodation party, incurred a present liability to the accommodation party immediately upon the acceptance of the bill. The proper analysis of the position, say counsel for the respondent, is that, at the time of acceptance of each bill, the applicant incurred a contingent liability to indemnify the acceptor bank in the event that the bank was called upon to discharge the bill out of its own funds.

We think that this submission is sound. A surety who has not paid the debt may nonetheless obtain an order in equity compelling the principal debtor to relieve him or her by paying the debt: see
Ascherson v. Tredegar Dry Dock and Wharf Company Limited (1909) 2 Ch 401. But, according to the traditional view, in the absence of an agreement to the contrary the principal debtor does not become indebted to the surety until the surety has discharged the debt: see
Re Mitchell, Freelove v Mitchell (1913) 1 Ch 201,
Re Fenton; Ex parte Fenton Textile Association Limited (1931) 1 Ch 85,
Rankin v Palmer (1912) 16 CLR 285. ``The Modern Contract of Guarantee'' O'Donovan and Phillips say at p. 436:

``But a surety's right to quia timet relief does not constitute an existing debt. Thus a guarantor who has not paid cannot prove in the principal debtor's bankruptcy for his right of indemnity as an accrued liability.''

[original emphasis]

See also Rowlatt on ``The Law of Principal and Surety'', 4th ed at pp. 136-138.

This traditional view was reaffirmed and applied in Wren v Mahony: see the judgment of Barwick CJ, with whom Windeyer and Owen JJ agreed, at pp. 225-229. After reviewing the relevant authorities the Chief Justice affirmed the proposition ``that the existence of a cause of action before the plaintiff has paid the debt, or part of it, depends upon the fact that the defendant has given his promise to pay the debt himself''.

In essence, the applicant's case is that KD Morris represented a departure from the traditional view of a surety's position. Counsel argue that, notwithstanding that fact, it is the duty of this Court to follow that decision, as

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ATC 4094

being the most recent statement of the High Court upon the matter.

There is no doubt that it is the duty of this Court to take its law from the most recent relevant pronouncement of the High Court. Where such a pronouncement is clear, it does not matter that it may depart from the law as previously understood. But where there is some ambiguity in the relevant High Court judgments, a question may arise as to whether or not the High Court intended to depart from the from the previously accepted law. It is usually reasonable to work upon the basis that, if the High Court intends to depart from well established earlier law, it will clearly say so.

These observations apply to the present case. As we have already indicated, the traditional view is both well known and long established. It was reaffirmed in the High Court itself as recently as 1972. We agree that there are passages in KD Morris which might be read as indicating an opinion that an accommodated party becomes presently liable to an accommodation party immediately upon the acceptance of a bill. But these passages are unclear. When it is realised that any such view would depart from the well-understood earlier law, the correct course - as it seems to us - is to decline to construe these passages in this way. We think that we should hold that the applicant incurred no present liability in respect of each of the subject bills until that bill was discharged by the acceptor. As this event did not occur, in respect of any of the subject bills, within the taxation year ended 30 June 1984, the payments required to discharge the bills did not constitute expenditure incurred in that taxation year. The first question in the Special Case should be answered: (a) No; (b) Yes; (c) No.

The promissory notes

It is common ground between the parties that each of the subject promissory notes fell within the definition of that instrument which is contained in s. 89(1) of the Bills of Exchange Act viz:

``89(1) A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.''

Section 94 of the Act provides:

``94 The maker of a promissory note, by making it -

• (a) engages that he will pay it according to its tenor; and
• (b) is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse.''

Section 95(1) of the Bills of Exchange Act applies the provisions of the Act relating to bills of exchange, with the necessary modifications and subject to the provisions of Part IV of the Act - dealing particularly with promissory notes - to promissory notes. Subsection (2) goes on to provide that, in applying those provisions, ``the maker of a note shall be deemed to correspond with the acceptor of a bill...''.

Taking their stand upon these provisions, counsel for the applicant contend that the situation regarding the promissory notes is perfectly clear, that upon the making of the note their client came under an immediate liability to pay the value of the note, albeit at a future date, so that the relevant expenditure was incurred at the time when each note was drawn. That argument receives at least qualified support from the decision in
David v Malouf & Anor (1908) 5 CLR 749. In that case, the respondents petitioned for sequestration of the appellant's estate, relying on his indebtedness to them under six promissory notes, none of which had yet fallen due for payment. Section 37 of the Insolvency Act 1890 (Vic), under which the petition was brought, required that the debt of the petitioning creditor ``be a liquidated sum due at law or in equity, payable either immediately or at some certain future time''. In rejecting the appeal, Griffith CJ, with whom Barton, O'Connor, Isaacs and Higgins JJ all agreed, expressed the view at p. 753 ``that the relation between the maker and the holder of a promissory note is that of debtor and creditor - certainly for the purposes of the Insolvency Acts''. He held that the word ``due'' referred to the nature of the obligation, not the time of payment. However, in
W Nevill & Co Ltd v FC of T(1937) 56 CLR 290 the High Court reached a result inconsistent with the argument of the applicant. It is necessary to analyse that case carefully.

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ATC 4095

Nevill concerned the deductibility, for income tax purposes, of moneys paid by the taxpayer to its former ``additional managing director''. Pursuant to an agreement made with him, £1,500 was paid in cash in March 1931 and a further £1,000 was paid pursuant to ten promissory notes, each of £100, maturing each month between March and December 1931. Accordingly, £1,900 was paid in the taxation year ended 30 June 1931. The taxpayer claimed the full £2,500 as a deduction, but it was disallowed. The matter came before Evatt J who stated a case for the Full High Court, the question being whether the Commissioner should have allowed a deduction ``of the sum of £2,500 or any and if so what part'' of it. The Court answered that question by saying that a deduction of £1,900 should have been allowed.

The distribution of the deduction between the two tax years was only a minor question in Nevill. The main question was whether the payments were deductible at all. But, according to the summary of argument in the Commonwealth Law Reports, counsel did address this subsidiary issue. Counsel for the taxpayer submitted that the liability was incurred immediately upon the making of the promissory notes and counsel for the Commissioner contended that a deduction for each promissory note might only be claimed in the year of income in which it was actually met.

Latham CJ described the subsidiary issue as a ``difficult question''. At pp. 302-303 he said:

``The outgoing, in order to be deducted, must be an outgoing `actually incurred' (sec. 23(1)(a)). The word used is `incurred' and not `made' or `paid'. The language lends colour to the suggestion that, if a liability to pay money as an outgoing comes into existence, the quoted words of the section are satisfied even though the liability has not been actually discharged at the relevant time. The word `actually' is not inconsistent with this view. It is only the incurring of the outgoing that must be actual; the section does not say in terms that there must be an actual outgoing - a payment out. On the other hand the section does not speak of debts or liabilities, but of losses and outgoings. As a general rule the word `outgoing' in itself would be understood to be limited to money that actually went out and not to include money which would go out at some future time. It is impossible to avoid the reflection that, if it were held that deductions could be obtained in any given year by the simple process of signing promissory notes in respect of genuine liabilities which would not fall due until that year had expired, a taxpayer would be able, by such action, to influence the rate of tax in his own favour in an exceptionally profitable year. The question is, therefore, one of considerable importance. This question was not argued in the present case because the promissory notes outstanding on the 30th June 1931 have since been paid and the deduction can be claimed in respect of the income of the following year. The taxation of companies is at a flat rate, and therefore it is immaterial to the parties whether or not the £600 representing the later promissory notes should be deducted in respect of the earlier year. For that reason it is not necessary to give a reasoned decision upon the question mentioned. I would require to hear full argument before deciding this question. I merely state my view, not as a concluded opinion, but in order to reach a determination in this case, that the sum of £600 should be deducted from the income of the year ending 30th June 1932 and not from the income of the preceding twelve months.''

Rich J at p. 304 said:

``The interesting question to which year or years the expenditure should be allocated in view of the fact that it was secured by promissory notes maturing over two years was not raised by the commissioner or argued by counsel. I do not propose to consider it and am content to adopt the course proposed by the Chief Justice without deciding the question of law.''

Dixon J did express a definitive conclusion upon the matter. But he merely said, at p. 307:

``In my opinion the retiring allowance is a deductible outgoing. But I do not think that so much of it as was represented by promissory notes payable after 30th June 1931 can be deducted in the assessment for the financial year ending 30th June 1932.''

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ATC 4096

The date ``1932'' should obviously have been ``1931''. Dixon J agreed with the answer proposed by Latham CJ.

The final member of the Court, McTiernan J, merely said at p. 309 that he agreed ``that the deduction for the year ending 30 June 1932'' (this also should have read ``1931'') ``should be limited to £1,900''.

Nevill can hardly be regarded as a satisfactory authority upon this subsidiary question. The statements of some of their Honours that the subsidiary question was not argued are puzzling. As we have pointed out, according to the summary of argument in the Commonwealth Law Reports, it was; although briefly. More importantly, the Chief Justice gave reasons without a decision, Dixon J a decision without reasons. But the fact remains that, the subsidiary question falling for determination, it was answered adversely to the taxpayer and on the basis that the moneys payable in respect of the promissory notes were deductible only in the year in which the payments were made.

Nevill has been considered by the High Court on numerous occasions but, according to the researches of counsel assisted by the SCALE computer, on only one occasion has any reference been made to what we have called the subsidiary question; that is, the year in which the deduction should be allowed. This reference was in
Commr of Taxation (NSW) v Ash (1938) 61 CLR 263. The question in that case was whether certain payments made by a solicitor in compromise of claims made against him by reason of the frauds of his former partner were deductible from his taxable income. The Court held that they were not, they were outgoings of capital. But Dixon J commented upon the question of timing of the deductions, if they had been allowed. The payments were made over a period of some years. At p. 282, in the course of an expatiation about the recurrent nature of expenditure on revenue account, his Honour said:

``Where the reason for allowing a deduction is that it is a normal or recurrent expenditure or an expenditure which is fairly incident to the carrying on of the business, it is evident that it can seldom be associated with any particular item on the revenue side against which to set it, and, as the ground of its allowance is that it is an incident or accident, something concomitant to the conduct of the business, it follows that to deduct it in the year when it falls to be met is consistent with the reason for deducting it and conforms with business principles. Thus in W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation..., where, although the matter was not argued, the court found it necessary to say whether the payments made to the retiring manager should be deducted in the period when they were agreed upon or that in which they were made, it was considered that the deductions should be made from the assessable income of the periods of account in which the payments were made.''

None of the other members of the Court, Latham CJ, Rich and McTiernan JJ, touched on the matter of timing.

Counsel for the respondent contend that unsatisfactory as they say it may be, Nevill represents a decision of the High Court which must be followed in this Court. On the other hand, counsel for the applicant argue that the case is an uncertain authority from which no clear ratio emerges. At the most, say counsel, the decision stands for the proposition that payments made under promissory notes may not be deductible in the year in which they are made when they are a means of effecting over a period of time a payment which is the equivalent of a salary payment over that time.

We have not found these competing contentions easy of resolution. But, in the end, we have reached the view that we should give effect to the actual decision in Nevill. The timing of the deduction was a matter which the Court had to consider, and in relation to which it made a decision. Nothing was said by any of the Justices to suggest that the decision depended upon the fact that the payments were being made in lieu of salary. On the contrary, in the only exposition of reasons given by any member of the Court, Latham CJ referred to the general circumstance that ``if it were held that deductions could be obtained in any given year by the simple process of signing promissory notes in respect of genuine liabilities which would not fall due until that year had expired, a taxpayer would be able... to influence the rate of tax in his own favour in an exceptionally profitable year''. This observation would equally apply to promissory notes given in the circumstances of the present case.

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ATC 4097

As we read them, there is nothing in either James Flood or Nilsen which derogates from the authority of Nevill. On the contrary, Nilsen, at least, seems to support the order made in Nevill. It will be recalled that, in Nilsen, the employees had already become entitled to take their long service leave. So the taxpayer, within the relevant tax year, was in the position that it was bound to pay the value of that leave on demand. Yet it was held that the relevant liability had not yet been ``incurred''; in Sir Garfield Barwick's words the liability had not yet ``come home''. In the present case, in the relevant year of income, the applicant certainly incurred a legal obligation to pay the value of the promissory notes. But that obligation did not become a present obligation until the respective maturity dates. Until then the obligation did not ``come home'' to the applicant. As those maturity dates all lay outside the year ended 30 June 1984, the amounts payable in respect of the notes were not expenditure incurred in that year. Question 2 should be answered: (a) No; (b) Yes; (c) No.

The applicant must pay the costs of the Special Case.

THE COURT ORDERS THAT:

1. Question 1 in the Special Case be answered as follows:

• (a) No;
• (b) Yes;
• (c) No.

2. Question 2 in the Special Case be answered as follows:

• (a) No;
• (b) Yes;
• (c) No.

3. The applicant pay to the respondent his costs of the Special Case.