Case: Commissioner of Taxation v Raymor (NSW) Pty Limited [1990] FCA 193 ; (1990) 24 FCR 90
Outcome: discussed
In particular, reliance was placed on the judgments of Lee J at first instance and of the Full Court in the Woolcombers case : Woolcombers (WA) Pty Limited v Commissioner of Taxation [1993] HCA 69 ; 93 ATC 4 ,342 (Lee J) and Commissioner of Taxation v Woolcombers (WA) Pty Limited [1993] FCA 631 ; (1993) 47 FCR 561 (Full Court) and on the Full Court judgment in Commissioner of Taxation v Raymor (NSW) Pty Limited [1990] FCA 193 ; (1990) 24 FCR 90. 56 At about the time of this first instance judgment in Ogilvy &amp; Mather 21 ATR 841 , the Full Court in Raymor 24 FCR at 97 (Davies, Gummow and Hill JJ) expressed the relevant principles as follows: A loss or outgoing to be deductible under s 51(1) must be incurred in the year of income. What is meant by the word "incurred" in this context has been the subject of considerable discussion in the cases. Central to that discussion is the classic statement of Dixon J in New Zealand Flax Investments Ltd v Commissioner of Taxation (Cth) [1938] HCA 60 ; (1938) 61 CLR 179 at 207, referred to with approval by the court in Commissioner of Taxation (Cth) v James Flood Pty Ltd [1953] HCA 65 ; (1953) 88 CLR 492 at 507. His Honour there said: "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." Some propositions are now well established. Outgoings may be incurred though the sum in question has not been paid or the liability discharged: New Zealand Flax Investments Ltd (supra) and James Flood Pty Ltd (supra). An outgoing may be incurred notwithstanding that it may be defeasible: Commonwealth Aluminium Corp Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 210 at 223-224, cited with approval in Commissioner of Taxation (Cth) v Australian Guarantee Corp Ltd [1984] FCA 240 ; (1984) 2 FCR 483 , per Toohey J (at 487); RACV Insurance Pty Ltd v Commissioner of Taxation (Cth) [1974] VR 1 and Commercial Union Assurance Co of Australia Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 32. An outgoing may be incurred notwithstanding that the amount of that outgoing is payable in the future. It is not necessary that the outgoing be one both due and owing at the time it is "encountered": James Flood Pty Ltd at 507; Commissioner of Taxation (Cth) v Australian Guarantee Corp Ltd (supra). However, "a liability which has not `come home' in the year of income, in the sense of a pecuniary obligation which has become due" will not have been incurred until the year of income in which there is a presently existing liability: Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 6 ; (1981) 144 CLR 616 , per Barwick CJ (at 623) and per Gibbs J (at 627). As the Australian Guarantee Corp case demonstrates, evidence of commercial and accountancy practice may be relevant in determining whether an outgoing is referable to the accounting period in which it is claimed although such evidence will not be a substitute for the words of s 51(1) itself: per Toohey J (at 492-493), per McGregor J (at 501-503); see also Hooker Rex Pty Ltd v Commissioner of Taxation (Cth) (1988) 79 ALR 181 at 189, 203. It may be noted that in the present case no evidence of this kind was adduced by the Commissioner. 57 By and large this expression of principle is consistent with Ogilvy &amp; Mather, though the propositions in the sixth bullet point in Ogilvy &amp; Mather can be seen to be somewhat more qualified than as expounded in Raymor . 59 In the High Court in CityLink [2006] HCA 35 ; 228 CLR 1 , Crennan J (with whose reasons Gleeson CJ, Gummow, Callinan and Heydon JJ agreed) referred at 38 [127], without disapproval, to the synthesis essayed by Hill J in Ogilvy &amp; Mather. In her Honour's reasons (at [122]-[126]) some analysis of the jurisprudence was made upon which the respondent here relied. After referring in [122] to New Zealand Flax [1938] HCA 60 ; 61 CLR 179 and James Flood [1953] HCA 65 ; 88 CLR 492 and, in particular, to the notions of "definitely committed" and "completely subjected", her Honour referred to the reasons of Barwick CJ in Nilsen Development Laboratories Pty Limited v Federal Commissioner of Taxation [1981] HCA 6 ; (1981) 144 CLR 616. The reference to that decision is important in that the Chief Justice (with whose reasons Mason J agreed generally, and Aickin and Wilson JJ agreed (together with the reasons of Mason J)) said at 623 that the language of Dixon J in New Zealand Flax "need [ed] to be carefully perused and applied" and then went on to say the following: ...Granted that exhaustive definition of what may be denoted by the word "incurred" in s 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 Federal Commissioner of Taxation [1944] HCA 28 ; (1944) 71 CLR 596 at p 606 clearly enough indicates that to satisfy the word "incurred" in s 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 Federal Commissioner of Taxation (1938) 61 CLR, at p 207 which presently needs emphasis is that the word "incurred" in s 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". The language of Crennan J in [123] can be seen to revivify this passage from Nilsen Developments [1981] HCA 6 ; 144 CLR 616 which did not form an express part of Hill J's synthesis in Ogilvy &amp; Mather , though it was referred to in Raymor . It can be seen as a reiteration, perhaps, of the fourth proposition in Ogilvy &amp; Mather supported by reference to Federal Commissioner of Taxation v Australian Guarantee Corporation Limited [1984] FCA 240 ; (1984) 2 FCR 483 , a case in which Nilsen Developments and Emu Bay Railway Co Ltd v Federal Commissioner of Taxation [1944] HCA 28 ; (1944) 71 CLR 596 were distinguished. Though Nilsen Developments was in respect of long service leave obligations in a specific statutory context, it is clear that the lack of a liability to make a payment until leave was taken or cessation of employment meant that there was no incurring of the outgoing. 66 This argument and conclusion must contend, however, with a number of authorities. The first is Raymor [1990] FCA 193 ; 24 FCR 90. The taxpayer sold and distributed plumbing goods, including copper tubing. It purchased most of its supplies of copper tubing from a company (MML) for resale. The managing director of the taxpayer agreed with an officer of MML in the last days of each of three years of income. Each agreement was concerned with the purchase of a significant amount of copper tubing with payment being made in advance of delivery. It was in effect a forward purchase agreement with a discounted price and rise and fall clause. The contract was entered and payment was made before the end of June, with delivery in the next financial year. 67 In Raymor, the Commissioner argued that where an outgoing was incurred for trading stock, the stock must be on hand at the end of the year of income. This mirrored when the income was derived from disposal of trading stock: J Rowe and Son 124 CLR 421. The Commissioner argued that the outgoings were properly to be regarded as characterised as having been incurred in the year of income not for trading stock or in the purchase of trading stock, but for the right to acquire trading stock on capital account. Having referred to the principles dealing with "incurred" (see above), the Court concluded that the outgoing was incurred in the year of income, saying at 97: It follows, therefore, that 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 MML, 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. [emphasis added] 76 The Full Court rejected the argument. In so doing, it referred to and relied on the two passages from Raymor 24 FCR at 97 and 101, cited earlier. This was to support the conclusion that the entry into the obligation to pay for future goods was sufficient for there to be an incurring of the liability to pay for them, even if the obligation was defeasible. Coles Myer [1993] HCA 29 ; 176 CLR 640 was then referred to. At 47 FCR at 573-575 the Full Court expressed its reasons fully for coming to the view that there was an accrued obligation or present liability imposed by definite contractual commitment. The Court said that it was not necessary for the taxpayer to have an interest in the wool, though it was recognised that equity would give protection to the taxpayer's interests. Stern v McArthur [1988] HCA 51 ; 165 CLR 489 was referred to. The Court rejected the argument of the Commissioner based on the requirement of delivery to create a present and accrued liability to pay. It agreed with Lee J's analysis. The Full Court did conclude, however, with the following passage at 47 FCR 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. 77 As I have said earlier, the application of the principles in Sunbird Plaza to the question of "incurred" has force, unconstrained by authority. So to conclude would lead to a certain harmony in timing between recognition of derivation of income and the incurring of an outgoing. It would give expression to the long-recognised underlying legal analysis in cases such as McDonald v Dennys Lascelles, Automatic Fire Sprinklers, and Sunbird Plaza . It would conform more clearly with the views of Barwick CJ in Nilsen Developments [1981] HCA 6 ; 144 CLR 616. Nevertheless as a single judge, I am clearly bound by Raymor and Woolcombers. The essence of the argument, as I apprehend it, that was put to the Full Court in Woolcombers , was put to me, though, perhaps, in a somewhat more developed form. Unless the last passage that I have quoted above entitles me to find differently, on the authority of both Raymor and Woolcombers , I should find that the obligation to pay the purchase price on settlement was incurred at the time of the exchange of contracts. 79 In my view, I am bound to apply the analysis found in Raymor and Woolcombers . Doing so by reference to the particular contract here, I conclude that the obligation to pay the residue was incurred in the 1999 year of income.