Case: Federal Commissioner of Taxation v Australian Guarantee Corporation Limited [1984] FCA 240 ; (1984) 2 FCR 483
Outcome: referred to
In Ogilvy &amp; Mather Pty Limited v Commissioner of Taxation (1990) 21 ATR 841 at 873-874 Hill J sought to summarise the principles from the authorities. This summary was adopted by the Full Court in CityLink 141 FCR at 79-80. It was as follows: &#8226; It is unsafe to attempt an exhaustive definition of a term such as "incurred": New Zealand Flax Investments Ltd at 297 per Dixon J; Hooker Rex Pty Ltd v Commissioner of Taxation (Cth) (1988) 19 ATR 1241 at 1249-1250; &#8226; In considering whether a loss or outgoing is incurred the Courts in Australia have adopted what is described as a "legal" or "jurisprudential approach" and not what may be described as a "commercial approach": Coles Myer Finance Ltd v Commissioner of Taxation (Cth) [1993] HCA 29 ; [(1993) 176 CLR 640] ; &#8226; An outgoing may be incurred notwithstanding that the amount is not paid in the year of income: Commissioner of Taxation (Cth) v James Flood Pty Ltd [1953] HCA 65 ; (1953) 88 CLR 492 at 507; &#8226; An outgoing may be incurred notwithstanding that at the end of the year of income it represents a present liability then due although payable in the future: Commissioner of Taxation (Cth) v Australian Guarantee Corporation Ltd ( 1984) [1984] FCA 240 ; 2 FCR 483. However, it will be important that the liability is "presently existing" during the year of income; &#8226; It will be necessary that the taxpayer has completely subjected itself to the loss or outgoing, that is to say definitively committed itself to it in the year of income : Merrill Lynch International (Australia) Ltd v Commissioner of Taxation (Cth) [2001] FCA 1127 ; (2001) 113 FCR 79 per Lindgren J. It will not be sufficient if the loss or outgoing is no more than pending, threatened or expected, no matter that it may be certain that the loss or outgoing will occur in the future: Flood at 5-7-508 ; Hooker Rex at 1249-1250; and &#8226; However, a loss or outgoing may be incurred in the year of income notwithstanding that the obligation to pay it is theoretically defeasible: Flood at 506-507; Coles Myer at 670 or, perhaps, even contingent: Coles Myer at 670 per Deane J, citing Commercial Union Assurance Co of Australia Ltd v Commissioner of Taxation (Cth) (1977) 32 FLR 32 at 42-43, but see, however, Flood at 507-508. 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. 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. 80 This was not a liability that accrued day to day. It was a once and for all contractual undertaking. As in Woolcombers 47 FCR at 575-576, there is here no complexity (as in New Zealand Flax [1938] HCA 60 ; 61 CLR 179) , no day-to-day accrual (as in Coles Myer [1993] HCA 29 ; 176 CLR 640) or other appropriate financial apportionment (as in Australian Guarantee [1984] FCA 240 ; 2 FCR 483). The question of referability is not dictated by any principle of matching. Given the approach of the Full Court in Woolcombers to the virtually identical question, I would conclude that the outgoing incurred was referable to the 1999 year of income.