Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation

Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation - [1981] HCA 6 - HCA 1981 case summary — Zoe

[8]

After fifteen years' service an employee is entitled to thirteen weeks long service leave and he accumulates a proportionate additional entitlement after fifteen years' service (cl. 6 (1)). If the employee's service terminates after ten years but before fifteen years, he is entitled to a proportionate amount of long service leave where the employment is terminated - (i) by the employer for any cause other than serious and wilful misconduct; or (ii) by the employee on account of illness, incapacity or domestic or any other pressing necessity where such illness, incapacity or necessity is of such a nature as to justify such termination; or (iii) by the death of the employee (cl. 6 (2) (b)). Clause 6 (3) prohibits payment in lieu of leave, except as permitted by the Award. The Award does permit payment to an employee who is entitled to long service leave on the termination of his employment or to the personal representative of such an employee where the employee dies (cl. 8 (2)). But an employee who remains in employment is not entitled to any payment prior to the time when he commences the period of leave (cl. 7), and clause 8 defines the times when leave is to be granted and taken. Whenever an employee goes on long service leave, he is entitled to "the rate of wage then currently prescribed" (cl. 7 (1)), and if the rate is changed during the period of leave and the employee has been paid in advance in respect of his long service leave, the advance payment must be adjusted, upon the employee's return to duty, to accord with the changed rate to the extent to which it is applicable (cl. 7 (2)). His Honour sums up the relevant evidence as follows [2] : The employees entitled to long service leave had not been granted and had not taken long service leave during the income year; and at the end of the year, leave was not then granted to any employee, nor was any employee then required to take it. At the end of the year, the entitlement of the relevant employees was not a present entitlement to money. Reciprocally, the respondent's obligation was not then a liability to pay money. I agree with his Honour when he says: A pecuniary liability could not arise before the time when an employee went on leave (cl. 7), or his employment was terminated (cl. 8 (2) (a)) or he died (cl. 8 (2) (b)). Though it was clear that a pecuniary liability would be imposed by the Award so soon as one of these events occurred, no pecuniary liability was imposed during the income year. Though it was certain that a liability to pay money to these employees or their respective personal representatives would at some future time be imposed by the Award, the time when that would occur and the quantum of the payment which would then have to be made depended upon further events. 1. (1979) 41 F.L.R., at pp. 38-39; 27 A.L.R., at p. 242; 10 A.T.R., at p. 257; 79 A.T.C., at pp. 4521-4522. 2. (1979) 41 F.L.R., at p. 39; 27 A.L.R., at p. 242; 10 A.T.R., at p. 258; 79 A.T.C., at p. 4522.

[17]

Much discussion took place in the argument of these appeals and indeed in the judgments of both courts below as to the rationale and applicability of this Court's decision in Federal Commissioner of Taxation v. James Flood Pty Ltd. [5] (" Flood's Case "). Whilst this case may be said to afford useful guidance in the general area with which this case is presently concerned, I would not think that either the conclusions of that case or the reasons expressed therefore necessarily dispose of the problem now presented. Indeed, I would be disinclined myself to take too much from the Court's decision in Flood's Case. It is, of course, quite possible to treat members of the Court as saying that, without payment of the appropriate amount of wages in respect of leave, whether long service or annual, in the course of actually being taken, no sum should be regarded as deductible under s. 51 (1). But, in my opinion, there were so many other factors upon which the Court's precise decision in that case seem, according to their reasons, to have been placed that I would think it better not to regard the case as authority of a kind which could be said to resolve the question arising in the present case. In particular, I do not feel confident myself that the use of the word "accrual" in the reasons for judgment in that case was so accurate that its use could be translated into the present circumstances. To my mind, the Court in truth in that case could have reached its conclusion directly on the ground that, in the case of award provisions such as were thus in question, only actual payment for leave being taken could support a claim for deduction under s. 51 (1). But I do not read the Court's reasons as saying that, or at any rate as saying it unequivocally. I would prefer myself therefore to treat the questions arising in the present case as not covered by authority, however much I might think that the reasons in Flood's Case tend towards the support of a conclusion which I would otherwise form.

[29]

The first argument on behalf of the taxpayer was that the amount calculated to be payable to the employees in respect of leave, or alternatively the part of that amount attributable to the year of income, was a loss or outgoing "incurred" in the year of income, within the meaning of s. 51 (1) of the Income Tax Assessment Act 1936, as amended. The provisions of what is now sub-s. (3) of s. 51 did not form part of the section at the relevant time. The argument was that during the year of income in question the taxpayer was "definitively committed" to the payments in respect of the leave, and was under a present accrued liability to make the payments. The principle to be applied in deciding whether a loss or outgoing was "incurred" is clear enough. It is not necessary that there should have been any actual disbursement: New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [9] ; Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation [10] ; Federal Commissioner of Taxation v. James Flood Pty. Ltd. [11] ; and see King v. Commissioner of Inland Revenue [12] . Indeed, it was suggested in Federal Commissioner of Taxation v. James Flood Pty. Ltd. that it is not necessary that there should be an immediate obligation enforceable at law whether payable presently or at a future time, or that the obligation should be indefeasible. It is not now necessary to consider whether those suggestions should be accepted as correct. But what is clearly necessary is that there should be a presently existing liability. In Federal Commissioner of Taxation v. James Flood Pty. Ltd., this was expressed by saying that the provisions of s. 51 (1) cover "outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement", and that those provisions "do not admit of the deduction of charges unless the taxpayer has completely subjected himself to them". In other words, s. 51 (1) does not cover "a loss or expenditure which is no more than impending, threatened or expected": New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [12a] .

[35]

Where the income of the taxpayer is derived from trade, there is not really a difference between the concept of income and that of profit which is significant for the purpose of answering questions arising under the Act, as Walsh J. pointed out in J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation [18] . My remarks, like those of Walsh J., were directed to the case where the question, properly regarded, was the ascertainment of income. They obviously do not mean that a trader who submits returns on an earnings basis can successfully claim that all deductions which might on commercial principles be considered in ascertaining profit can be made in determining the income, whether or not those deductions fall within s. 51. Such an approach would leave little scope for the operation of the section, and would be contrary to the approach which the courts have consistently adopted in Australia. In J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation [19] , Walsh J., after making the remarks to which reference has been made above, went on to say: the differences between the Commonwealth Act and the English income tax law may more often be of importance in deciding questions as to the allowance of deductions (as for example in Federal Commissioner of Taxation v. James Flood Pty. Ltd. [20] ) than in determining the manner in which, or the period at which, items of revenue should be taken into account in computing income (or profits) and in particular in determining the use which may properly be made of the principles and methods recognized and followed in making those computations in business and in commerce. In Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation [21] , it was because Fullagar J. considered that the matter was one of arriving at the correct figure representing income, and that s. 51 really had no bearing on the case that he held that the case depended on "the conceptions of business and the principles and practices of commercial accountancy" [22] . ancy. For once income has been ascertained, and the question is whether a deduction is allowable, "it is not a matter depending upon proper commercial principles or accountancy practice but upon the legal criterion set by s. 51 (1)": Caltex Ltd. v. Federal Commissioner of Taxation [23] . 1. (1951) 82 C.L.R. 364. 2. (1977) 137 C.L.R. 347, esp. at pp. 352-354, 366-367. 3. (1977) 137 C.L.R., at p. 352. 4. (1971) 124 C.L.R. 421, at p. 433. 5. (1971) 124 C.L.R., at p. 434. 6. (1953) 88 C.L.R. 492. 7. (1951) 82 C.L.R. 364. 8. (1951) 82 C.L.R., at p. 368. 9. (1960) 106 C.L.R. 205, at p. 218.

[42]

at the heart of the joint judgment in the James Flood Case lies a recognition of the competing concepts of the nature of the liability to make payments in respect of annual leave, namely, the commercial view of that liability as a progressive one which should be treated as part of the cost of labour employed from day to day and the jurisprudential view that the liability remains the ordinary liability to pay wages to an employee in respect of a period of employment notwithstanding that the employee's entitlement to leave excuses him from working or attending for work during the period. Logically, the choice between these competing views is not affected by whether or not the qualifying period of service has been completed. In determining entitlement to a deduction under s. 51 (1) of the Act, their Honours accepted the jurisprudential analysis as the relevant one. In Flood the Court in its unanimous judgment observed [29] : The payment is made to the employee in respect of the period of leave and forms part of his ordinary wages. The award therefore clearly regards the payment as something made in respect of the two weeks when leave is actually taken. Prima facie it prohibits the substitution of a money payment for the leave. The prima-facie position is qualified only in the case of an employee who lawfully leaves his employment or whose employment is terminated without his fault. These comments are equally true of the provisions in this case. The Court went on to say [30] : There was not an accrued obligation, whether absolute or defeasible. There was at best an inchoate liability in process of accrual but subject to a variety of contingencies . In short the deduction claimed does not represent an expenditure associated with the production of income before 30th June 1947 for which a liability had been completely incurred before that date. 1. (1953) 88 C.L.R. 492. 2. (1960) 103 C.L.R. 650. 3. (1979) 41 F.L.R., at p. 47; 27 A.L.R., at pp. 249-250; 10 A.T.R., at pp. 263-264; 79 A.T.C., at p. 4527. 4. (1953) 88 C.L.R., at pp. 504-505. 5. (1953) 88 C.L.R., at pp. 507-508.

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