The Incurred Issue
88 This issue may be stated as: whether the Tribunal erred in concluding that the Settlement Amount payable by Glendale under the Contract of Sale and the balance of the purchase price payable by Glendale under the Purchase of Business Agreement were not "incurred" within the meaning of s 8-1(1) of the 1997 Act on 30 June 1999 but were incurred later. The issue arises in circumstances where: Glendale entered into the contracts in its capacity as the manager of the Glendale Property Syndicate; ACPS as trustee of the ACE Trust was a member (as to 40%) of the Glendale Property Syndicate as at 30 June 1999; the ACE Trust claimed carry forward losses in the 2006 year on the basis that it was entitled to a deduction in the 1999 year as to 40% of the relevant amounts; and (subject to the other issues to be considered on the appeal) the applicant was entitled to 100% of the net income of the ACE Trust for the 2006 year.
89 Section 8-1 of the 1997 Act (as applicable to the 1999 year) relevantly provided:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; …
90 The predecessor provision, considered in some of the cases discussed below, was s 51(1) of the 1936 Act. The differences between that provision and s 8-1 are not material.
91 In Citylink, Crennan J (with whom Gleeson CJ, Gummow, Callinan and Heydon JJ agreed) referred (at [91]) to the observations of Dixon J in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179. In that case, Dixon J noted that the words of the income tax legislation give rise to particular difficulties when a transaction takes more than a year to complete, because it is the words of the section (which may not apply comfortably to certain economic or commercial practices), rather than general principles, which contain the test for deductibility (at 199, 206-207). Crennan J then observed that the infinite variety of factual situations that have fallen to be considered since New Zealand Flax have led to continuing elucidation of the test for deductibility and how it applies to different facts.
92 The applicable principles were set out by Crennan J in Citylink at [122]-[125] as follows:
122 New Zealand Flax concerned the deductibility of interest payments payable in the future. In considering the test for deductibility, Dixon J said:
"To come within [the] 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."
It has long been recognised that an outgoing may be "incurred", but not "discharged", in the relevant year of income. In Federal Commissioner of Taxation v James Flood Pty Ltd Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ considered commercial and accounting practice and the test for deductibility and said of s 51(1):
"The word 'outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word 'incurred', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement."
(Emphasis added.)
The Court went on to say "outgoings" could only have been "incurred" if "in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them".
123 In Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation, Barwick CJ said a liability could only be treated as having been "incurred" within the meaning of s 51(1) if it had "'come home' in the year of income", yet his Honour recognised that a liability could be qualified as a deduction if it falls due in the year of income, but may be paid later.
124 In Coles Myer Finance Ltd v Federal Commissioner of Taxation Deane J, agreeing with the majority, stated:
"[T]he weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a 'loss or outgoing' which is 'incurred' within the meaning of that subsection notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled. (Footnotes omitted.)"
125 Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future. His Honour recognised that on some facts it would be apparent that a condition giving rise to a theoretical contingency could be treated, for practical purposes, as certain to be satisfied.
(Footnotes omitted.)
93 Three decisions of the Full Court of this Court were the focus of submissions in the present appeal in respect of the Incurred Issue. They were, in chronological order, Raymor, Woolcombers and Malouf.
94 In Raymor, the respondent was a supplier of goods including copper tubing. It entered into agreements for the purchase of copper tubing from a supplier. The agreements, which were in similar terms, provided for the sale by the supplier to the respondent of a specified quantity and quality of copper tubing, the delivery of the copper tubing and the payment of the purchase price. The purchase price was payable upon execution of each agreement. The price was, however, subject to variation, taking into account movement in the Australian copper price at the date of delivery. The relevant agreements were entered into in June 1984 and June 1985 and the purchase price stipulated in each agreement was paid in those months. Delivery under the June 1984 agreement started in July 1984 and continued for several months. Delivery under the June 1985 agreement started in July 1985 and continued for several months. In the 1985 and 1986 years of income, the price of copper rose from time to time so that, pursuant to each agreement, further amounts became payable by the respondent to the supplier under the rise and fall clause. These amounts were shown as part of the respondent's costs of stock and were allowed as a deduction in the years of income in which they were paid. They were not in dispute. The dispute concerned the respondent's claim for deductions under s 51(1) of the 1936 Act for the purchase price (before adjustment) under the June 1984 agreement in the 1984 year of income, and the purchase price (before adjustment) under the June 1985 agreement in the 1985 year of income.
95 The Full Court (Davies, Gummow and Hill JJ) held that when the respondent bound itself to pay the purchase price shown in each agreement, it then incurred that amount as an outgoing, notwithstanding that the price could be varied under the rise and fall provisions in each agreement. It was further held that payment of the price was strictly irrelevant to the time at which the outgoing was incurred. The Court said (at 97):
… at the point of time at which the respondent bound itself as a party to each of the contracts, and so became committed to pay the amount shown in each contract to [the supplier], it incurred the respective amount, notwithstanding that its obligation could be increased or reduced under the rise and fall provisions of the contract: cl 8. Payment thereafter was strictly irrelevant to the time at which the outgoing was incurred. It merely operated to discharge in the year of income the outgoing already incurred in that year. In this sense it is strictly incorrect to speak of the payment here in question as a prepayment. A presently existing obligation had arisen and had been discharged.
96 Their Honours also said (at 101):
Once, however, it is appreciated that an outgoing may be deductible notwithstanding that it may be defeasible, there can be no logical reason why an outgoing pursuant to a contract may not be deductible notwithstanding that the ultimate price payable upon delivery of the goods the subject of a contract may be varied upwards or downwards to reflect the increased cost of the goods. If the price increases, as it did in each of the years in question, the additional amount incurred on delivery will be deductible in the year in which delivery occurs. If it decreases, the amount credited or refunded to the purchaser will form part of the proceeds of business of the trader in the same way as would an exchange gain which results in a lesser amount of Australian dollars becoming payable for stock.
97 In Woolcombers, the taxpayer, a wool trader, entered into a number of forward contracts to purchase wool from woolgrowers. The purchase price in most cases was fixed at the time of the contract. However, in some cases, the purchase price was variable. In all of the contracts, payment was due a certain number of days after delivery, and property in the wool was to pass to the taxpayer upon payment. In the 1988 year of income, the taxpayer claimed as a deduction under s 51(1) of the 1936 Act its estimated liability under the forward contracts entered into during that year. The Full Court (Beaumont, French and Foster JJ) held that the primary judge's analysis of the effect of the contractual provisions, namely that an accrued obligation or present liability was imposed on the taxpayer by a definite contractual commitment, was correct (at 573). It followed that an "outgoing" was "incurred" within the meaning of s 51(1) of the 1936 Act in the 1988 year of income. The Full Court referred (at 574) to a submission by the Commissioner that, because delivery of the wool was a condition precedent to the performance of the taxpayer's obligations, no present liability to make a payment accrued until after the wool was delivered, that is, in the 1989 year. The Full Court considered that the cases relied upon by the Commissioner were distinguishable, with each case depending upon "the true interpretation of the particular language of the contract" (at 574-575). After noting that the Commissioner also relied on the 'force majeure' provisions of the contracts as indicating that no liability to pay the purchase price accrued to the taxpayer until delivery, the Full Court said it had difficulty accepting this submission, especially as a term to similar effect would ordinarily be implied in contracts of that kind in any event. Their Honours said (at 575):
In our view, much will depend upon the particular circumstances of the case at hand. If the defeasibility takes the form of a contingency such as drought or a similar frustrating event which ordinarily would be implied as a matter of business efficacy, it is difficult to argue that by reason of the existence of this contingency, no liability to pay the price has accrued.
98 In Malouf, which bears some factual similarly to the present case, the taxpayer was the purchaser under a contract for the sale and purchase of a retirement village. Upon entering into the contract (during the 1999 year of income), the taxpayer paid a deposit. The taxpayer was required to pay the balance of the purchase price in the sum of $33.25 million (the residue) upon settlement. Under the terms of the contract, settlement was not to occur until the vendor had completed Stage 1 of the contracted development work and upon the vendor being in a position to deliver a transfer of land. The primary issue in the appeals was whether the residue payable on settlement was "incurred" at the time the contract was entered into by the taxpayer (and so incurred during the 1999 year of income).
99 The findings of fact made by the primary judge, which were not disputed on appeal, included the following:
The contract provided for a deposit of $6.5 million, which was paid during the 1999 year of income, and payment of $33.25 million on settlement if a retirement village was constructed in accordance with what were described as 'Plans A'. The residue was to be reduced by $6 million if the development was completed in accordance with what were described as 'Plans B'.
At the time the contract was entered into, the land was vacant and had an agreed value of $2.5 million.
A town planning permit existed for the construction of buildings in accordance with Plans B. That planning permit was subject to 24 conditions and was due to expire on 8 October 1999.
No town planning permit had been obtained for the construction in accordance with Plans A, on which the contract price of $39.75 million was based. No building contract had been entered into.
On the settlement date, the vendor was obliged, on payment of the residue, to deliver to the purchaser a registrable instrument of transfer and make the certificate of title available for registration.
100 The Full Court (Sundberg, Jessup and Middleton JJ) considered in some detail the earlier Full Court decisions in Raymor and Woolcombers. In relation to Raymor, the Full Court considered the terms of the arrangements in that case to be materially different from those of the contract under consideration (at [33]). In relation to Woolcombers, the Full Court considered the contract terms in that case to be of a similar nature to those before the Court on appeal, but said that much will depend upon the true interpretation of the particular language of the contract and upon the nature of the contractual arrangements (at [45]). The Full Court concluded that the pecuniary liability was not incurred at the time of entering into the contract, but would only be incurred at settlement. Their Honours said (at [48]-[50]):
48 Looking then to the contract before us in the appeal, the obligations of the vendor were to bring the development to Stage 1 completion. The taxpayer was then obliged to pay the residue on settlement. The major portion of the value which the taxpayer obtained under the contract related to a development which did not exist at the time the contract was entered into by the parties. Not even the preferred planning permit was in existence which would give rise to the increased value of the land by reason of any development. The contract was not an unconditional agreement subject to defeasance by unforeseen events. The taxpayer's obligation to pay under the contract was dependent upon further performance by the vendor, and upon the happening of events which were anticipated but were under the control of neither party.
49 The fact is that with the executory contract before the primary judge, the liability to pay was not due until settlement and delivery of a transfer and title to the land. The focus of the contract so far as imposing an obligation on the taxpayer was to pay at settlement. The nature of the contract, involving the sale of land, whilst not decisive, is of relevance in applying established and well recognised legal and jurisprudential principles to the operation of the contract, as recognised by the primary judge.
50 The passages referred to above of Deane J in Coles Myer 176 CLR 640 (and adopted by Crennan J in Citylink 228 CLR 1) do not suggest any different analysis. The pecuniary liability must be actually incurred. It then may not matter that the amount is not payable until some future time, or may be defeasible or contingent. By operation of the contract in this appeal, the pecuniary liability was not incurred at the time of entering into the contract, but would only be incurred upon settlement.
101 In the present case, the applicant submits that the Reasons of the Tribunal demonstrate that it wrongly thought that deductions were being sought for the First Post Settlement Amount and the Final Post Settlement Amount payable under the Contract of Sale. The applicant also submits that: the Tribunal did not provide adequate reasons for its conclusion that the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were not incurred on 30 June 1999; the Reasons at [212] suggest that the Tribunal thought the possibility of a future breach or insolvency prevented amounts being incurred; if the possibility of a future breach or insolvency is reason to conclude that an amount payable under a contract cannot be incurred on entry into the contract, no amount payable in the future would be able to be incurred on entry into any contract; and the Tribunal misunderstood or misapplied the applicable principles.
102 The Commissioner accepts that the Tribunal failed to appreciate that the applicant's claim under the Contract of Sale was limited to the Settlement Amount. Further, the Commissioner accepts that, in its analysis of the two contracts, the Tribunal misconstrued some of the provisions of the contracts. The Commissioner relies on grounds 1 to 4 of the notice of contention to uphold the decision of the Tribunal on the issue of whether the relevant amounts were incurred on 30 June 1999.
103 In our view, the Tribunal at [212]-[215] of the Reasons (set out above) effectively adopted a meaning of the term "incurred" in s 8-1(1) of the 1997 Act that was contrary to that which has been established by legal decisions: cf Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12-13 per Davies and Beazley JJ, with whom Hill J agreed; approved in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315 at [200] per Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ. In particular, the Tribunal relied on the fact that, under the Contract of Sale, the Glendale Property Syndicate was entitled to terminate the contract if an insolvency event occurred in relation to Prime Life (Glendale Hostel) Pty Ltd as a basis for concluding that "it was not known whether the Contract of Sale would proceed" (Reasons, [212]). However, the cases discussed above do not suggest that, without more, this type of contingency is enough to conclude that an outgoing is not incurred upon execution of a contract. Further, the reasons set out by the Tribunal at [213]-[214] of the Reasons were directed to the First Post Settlement Amount and the Final Post Settlement amount under the Contract of Sale, rather than the Settlement Amount. It was not explained why the Settlement Amount was not incurred upon execution of the Contract of Sale (apart from the reason given in [212], referred to above). Insofar as the balance of the purchase price under the Purchase of Business Agreement was concerned, the Tribunal said that this amount was incurred on the Completion Date (31 October 1999) because that was the day on which Prime Life (Glendale Hostel) Pty Ltd "would deliver what it was required to deliver" (Reasons, [212]). But the fact that Prime Life (Glendale Hostel) Pty Ltd was required to deliver certain things, including a registrable transfer, on the Settlement Date was not determinative. Insofar as the Tribunal relied upon the interdependence of the Purchase of Business Agreement with the Contract of Sale, we refer to the matters discussed above in relation to the Tribunal's reasoning regarding the Contract of Sale.
104 It follows that the Tribunal's decision, insofar as it concerned whether the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, is to be set aside. It is appropriate in the circumstances for the issue to be reconsidered by this Court. The parties approached the matter on this basis.
105 The Commissioner submits that the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were not incurred on 30 June 1999. The Commissioner's submissions can be summarised as follows:
(a) The obligation to pay the Settlement Amount was not incurred on 30 June 1999 because the liability to pay that amount was not due until Settlement and delivery of a registrable transfer: Malouf at [49]. At 30 June 1999, there was a promise to pay the Settlement Amount at Settlement. The promise remained executory until Settlement occurred. Until that time there was no pecuniary liability on the part of the Purchaser to pay the Settlement Amount.
(b) The conclusion that the obligation to pay was not incurred until 31 October 1999 does not depend on whether the contract required payment of the Settlement Amount following the delivery of title by the Vendor. Rather, the conclusion depends on the character of the promise to pay at Settlement as remaining executory until Settlement occurred. Whether considered in terms of special condition 8.1.1, the definitions in special condition 1, or general condition 12 of Table A, the Purchaser's obligation to pay at Settlement was contemporaneous with the Vendor's obligation to deliver the registrable transfer.
(c) The cases on specific performance relied upon by the applicant (Adderley v Dixon (1824) 1 Sim & St 607, 57 ER 239 at 240; Dougan v Ley (1946) 71 CLR 142 at 150; Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 at 151; ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615 at 630) do not assist the applicant. If a purchaser refuses to complete an executory contract to buy land, the vendor is not entitled to sue for the purchase money as a debt. Rather, the vendor is entitled to sue for specific performance or for damages for loss of the bargain: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 475-476.
(d) The obligation to pay the Settlement Amount was not incurred on 30 June 1999 for the further reason that Settlement under the Contract of Sale was made contemporaneous with Completion under the Purchase of Business Agreement and Completion was dependent upon further events, as discussed below.
(e) The obligation to pay the balance of the purchase price under the Purchase of Business Agreement was not incurred on 30 June 1999 because the liability to pay the balance was dependent upon further performance by the Vendor and the happening of events which were under the control of neither the Vendor nor the Purchaser: Malouf at [48]. The liability to pay was dependent upon, among other things: the application to be made by the Purchaser under Part 2.1 of the Aged Care Act 1997 (Cth) to become an Approved Provider being approved by the Secretary of the Department; the application to be made by Prime Life Corporation under Div 16 of Pt 2.2 of that Act for the transfer of the Approved Places to the Purchaser being made, and that application being approved by the Secretary of the Department; and the transfer of the Approved Places by Prime Life Corporation to the Purchaser if that Approval was forthcoming. The promise to pay remained executory until Completion occurred.
(f) The mechanism in clauses 3.6.1 and 3.6.2 of the Purchase of Business Agreement involved Prime Life Corporation - not the Vendor - holding the Approved Places on trust. The mechanism depended on the happening of events that were under the control of neither the Vendor nor the Purchaser, namely Prime Life Corporation making the application for the transfer of the Approved Places and the Secretary of the Department not refusing to approve the Purchaser as an Approved Provider and not refusing to approve the transfer of the Approved Places. In oral submissions, senior counsel for the Commissioner submitted that the mechanism in clauses 3.6.1 and 3.6.2 did not deal with a situation where the Secretary of the Department refused to grant Approved Provider status to the Purchaser before the Completion Date. In this scenario, it was submitted, the contract would be frustrated and the Purchaser would not be obliged to complete on the Completion Date. (In response to a question from the Court, the Commissioner made clear that he did not submit that a trust as contemplated in cl 3.6.2 could not arise: T82.)
(g) The obligation to pay the balance of the purchase price under the Purchase of Business Agreement was not incurred on 30 June 1999 for the further reason that Completion under the Purchase of Business Agreement was made contemporaneous with Settlement under the Contract of Sale, and Settlement was not due until delivery of a registrable transfer.
(h) The obligations to pay in the present case are relevantly the same as in Malouf. While in the present case there were two interrelated contracts whereas in Malouf there was only one contract, the Full Court's analysis of the taxpayer's obligation to pay is apposite in this case.
106 However, for the reasons that follow, we consider that both the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred upon execution of the contracts on 30 June 1999.
107 As set out above, an outgoing may be incurred if it is definitively committed to and presently existing, notwithstanding that it may be theoretically defeasible or possibly contingent: Coles Myer Finance Ltd v Commissioner of Taxation (Cth) (1993) 176 CLR 640 at 670-671 per Deane J, cited with approval in Citylink at [124]-[125]. Where an amount is payable under a contract, determining whether and, if so, when the amount is incurred requires reference to "the true interpretation of the particular language of the contract": Woolcombers at 575, applied in Malouf at [45]. Further, much will depend upon the nature of the contractual arrangements, which involves looking at the circumstances of the particular case: Malouf at [45].
108 In this case, the provisions of the Contract of Sale demonstrate that the Settlement Amount was required to be paid on 31 October 1999 and was definitively committed to on 30 June 1999. There was no obligation on the Vendor to deliver an instrument of transfer prior to any obligation to pay coming into existence: see special condition 8.1 and general condition 12 in Table A. Nor was there any condition precedent requiring the Vendor to take any action before there was an unqualified obligation to pay the Settlement Amount. It is important to distinguish the Settlement Amount from the two other amounts payable under the contract, namely the First Post Settlement Amount and the Final Post Settlement Amount. Unlike those amounts, the obligation to pay the Settlement Amount was not referable to the obtaining of planning approval or the completion of building works. In this sense, the outgoing in issue (namely, the Settlement Amount) was materially different from the outgoing in issue in Malouf. Further, the fact that the transaction in question involved the sale and purchase of real property, while a relevant aspect, does not of itself require the established principles to be applied in a particular way. The issue in such a case remains whether the outgoing is definitively committed to and presently existing, which is to be determined by reference to the true interpretation of the particular language of the contract.
109 The terms of the Purchase of Business Agreement demonstrate that payment of the balance of the purchase price under that agreement was definitively committed to on 30 June 1999: see clauses 2.2, 6.4, 8.2 and the definitions of "Completion" and "Completion Date". There was no obligation on the Vendor to deliver anything to bring the payment obligation into existence. Clause 2.2 was expressed in unconditional language and imposed an obligation to pay the balance of the purchase price (see [37] above). The obligation was to make payment on a fixed date; and upon such payment being made, title to the Business and the Assets and the benefit of the Goodwill would pass to the Purchaser (cl 8.2) (see [42] above).
110 Neither approval of the Purchaser as an Approved Provider nor approval of the transfer of the Approved Places from Prime Life Corporation to the Purchaser was a condition for payment of the balance of the purchase price. The obligation to pay the balance of the purchase price was not expressed to be conditional upon these matters. Further, we do not accept the Commissioner's submission that, if the Secretary of the Department refused the Purchaser's application for Approved Provider status before the Completion Date, the contract would be frustrated, this being outside the range of circumstances contemplated by cl 3.6.1 (set out at [40] above). We think the better view is that the words "has not granted" in cl 3.6.1 are capable of covering a situation where the application has been refused (as well as a situation where it is still being considered). This construction is open on the ordinary meaning of the words used. Further, this construction gives the provision a sensible operation in circumstances where, for example, a refusal is open to review or there is the potential for a new application for approval to be made. Accordingly, we do not accept the submission that, in the circumstance that the Secretary of the Department refused to grant Approved Provider status to the Purchaser before the Completion Date, the contract would be frustrated.
111 As we have concluded that both the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, the interdependency of the two contracts does not provide a basis to conclude that either outgoing was not incurred until a later point in time. Finally, we note for completeness that Taxation Ruling TR94/24 - Income tax: taxation amounts received by retirement village owners from incoming residents does not affect the above analysis. That ruling (now withdrawn) provided (in paragraph 7) that certain expenditure incurred by the owner in acquiring or developing a retirement village was considered to be expenditure of a revenue nature and "[a]ccordingly, a deduction will be allowed for that expenditure in the year in which it is incurred". The ruling did not, however, address the time at which the outgoing was incurred.