Case: New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60 ; (1938) 61 CLR 179
Outcome: referred to
The circumstances in which outgoings or losses will be seen as incurred in any year of income have been discussed in numerous cases. Recently, Lindgren J in Merrill Lynch International (Australia) Limited v Commissioner of Taxation [2001] FCA 1127 ; (2001) 47 ATR 611 undertook a careful analysis of the course of authority from New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60 ; (1938) 61 CLR 179 to Commissioner of Taxation v Mercantile Mutual Insurance (Workers' Compensation) Ltd [1999] FCA 351 ; (1999) 87 FCR 536. Since 2001, the Full Court of this Court and the High Court has each undertaken an analysis of the relevant authorities in CityLink Melbourne Limited v Commissioner of Taxation [2004] FCAFC 272 ; (2004) 141 FCR 69 and Commissioner of Taxation v CityLink Melbourne Limited [2006] HCA 35 ; (2006) 228 CLR 1. 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. 81 A deduction is referable to the year in which the advantage it secures is enjoyed: Coles Myer 176 CLR at 665; and New Zealand Flax at 207-208. The advantage secured and enjoyed was the binding of the vendor to an unconditional contract (in the sense first discussed) creating contractual rights capable of protection by a court of equity conformable with their extent: Stern v McArthur. This occurred in the 1999 year of income.