Case: Coles Myer Finance Limited v Commissioner of Taxation [1993] HCA 29 ; (1993) 176 CLR 640
Outcome: referred to
Before turning to the cases on incurred in relation to s 51(1) of the 1936 Act and s 8-1 of the 1997 Act, it is first necessary to analyse, with some more precision, the nature of the obligation to pay the purchase price. This is necessary because the legal character of the outgoing must be the subject of focus: Coles Myer Finance Limited v Commissioner of Taxation [1993] HCA 29 ; (1993) 176 CLR 640. 42 Special condition 11 of the contract, when read with relevant definitions and the Particulars of Sale, contains an express promise to pay the residue of the purchase price on the Settlement Date, that is, a day 14 days after the Stage 1 Completion Date. 55 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. 60 After this reference to Nilsen Development in [123], Crennan J at [124] referred to Deane J in Coles Myer [1993] HCA 29 ; 176 CLR 640 , quoting the following passage of Deane J's reasons at 176 CLR at 670: [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.) Crennan J continued at [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 [1993] HCA 29 ; (1993) 176 CLR 640 at 670-671. 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 [1993] HCA 29 ; (1993) 176 CLR 640 at 670-671. 72 At first instance, Lee J concluded that the obligation to pay the purchase price of all the wool on the forward contracts had been incurred in the year of income. The argument of the Commissioner was not that the estimate made of the sums meant that there was no incurrence. Rather, it was argued that the liability to pay had not "come home". Expert accounting evidence was led by both sides (something which did not occur here). The point of difference between the accountants was the truth and fairness of the accounts treating the payments as incurred or not. The expert called by the Commissioner relied heavily on the matching principle. Lee J put this evidence into context at 114 ALR at 653: Evidence from expert accountants does not supply the proper construction of s 51(1) of the Act but the evidence may assist the court to identify, and to understand the commercial significance of, the facts to which the subsection, duly construed, is to be applied: Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (Carden's case) [1938] HCA 69 ; (1938) 63 CLR 108 per Dixon J at 153 4; QBE Insurance Group Ltd v Australian Securities Commission (1992) 110 ALR 301 ; 38 FCR 270 per Lockhart J at 289 ; Coles Myer Finance Ltd v FCT [1993] HCA 29 ; (1993) 112 ALR 322 ; 93 ATC 4 ,214 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ at 4,221. The construction of s 51(1) is a jurisprudential analysis and not a construction assisted by the application of commercial principles (see Coles Myer per Mason CJ, Brennan, Toohey, Gaudron JJ at ATC 4,221, per McHugh J at ATC 4,227-8) but commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item claimed as a loss or outgoing under s 51(1): see FCT v James Flood Pty Ltd [1953] HCA 65 ; (1953) 88 CLR 492 at 506 7; Carden's case per Dixon J at 152 3. Furthermore, the manner of application of s 51(1) will depend upon the particular facts of each case. 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. 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.