Australia and New Zealand Banking Group Ltd. v The Commissioner of Taxation for the Commonwealth of Australia
Case
•
[1993] FCA 223
•16 APRIL 1993
No judgment structure available for this case.
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. VG258 of 1990
FED No. 223
Number of pages - 76
Income Tax
(1993) 93 ATC 4238
(1993) 114 ALR 67, (1993) 25 ATR 227
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J(1)
CATCHWORDS
Income Tax - ascertainment of assessable income - whether taxpayer entitled to a deduction in respect of its statutory liabilities in relation to Workcare claims by its employees - whether taxpayer entitled to a deduction in relation to "losses" on the disposal of luxury motor vehicles leased by bank to customers - whether losses incurred in the year of income.
Income Tax Assessment Act 1936 (Cth) ss.6(1), 17, 51(1), 57AF, 59
Acts Interpretation Act 1901 (Cth) s.15AB
Accident Compensation Act 1985 (Vic.) ss.5(1), 82, 93, 94, 99, 100, 101, 102, 103, 109, 116, 117, 119(4) 143, 146
Federal Commissioner of Taxation v. James Flood Pty Ltd (1953) 88 CLR 492
Nilsen Development Laboratories Pty Ltd v. Federal Commissioner of Taxation (1981) 144 CLR 616
RACV Insurance Pty Limited v. Federal Commissioner of Taxation (1975) VR 1
London Australia Investment Co. Ltd v. Federal Commissioner of Taxation (1977) 138 CLR 106
Memorex Pty Ltd v. Federal Commissioner of Taxation (1987) 77 ALR 299
Federal Commissioner of Taxation v. GKN Kwikform Services Pty Ltd (1991) 21 ATR 1532
HEARING
MELBOURNE, 9-11 November 1992; 21 December 1992
#DATE 16:4:1993
Counsel for the applicant: Mr D.M. Bloom QC
with Mr B.J. Sullivan
Solicitors for the applicant: Freehill Hollingdale and Page
Counsel for the respondent: Mr B.J. Shaw QC with Mr G.T.
Pagone
Solicitors for the respondent: Australian Government
Solicitor
ORDER
The Court orders that:
1. the determination of the annuities issues in these proceedings should be stood over generally, its result will be governed by the final result, including any appeal, in relation to the same issue arising before the Full Court of the Federal Court of Australia in proceedings No.VG396 and No.VG397 of 1992;Note: Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules.
2. the appeal be otherwise dismissed;
3. the respondent's costs of the appeal (including costs reserved) be paid by the applicant.
JUDGE1
SWEENEY J The applicant requested the respondent ("the Commissioner") to refer to the court his decision disallowing its Notice of Objection dated 28 May 1987 to his assessment of income tax in respect of the year ended 30 September 1986.
2. The applicant claimed that:
1. it was entitled to a deduction under s.51 of the Income Tax Assessment Act 1936 ("the Act") in respect of a provision established by it in its accounts in relation to Workcare claims for the year of income ending 30 September 1986;
2. it was entitled to a deduction for amounts said to be losses on the disposal of luxury motor vehicles leased by it to its customers in the same year of income.
3. I shall deal first with the Workcare issue.
4. The applicant's submissions read as follows:
"LEGISLATIVE BACKGROUND - ACCIDENT COMPENSATION ACT 1985
1. A new system of workers' compensation, known as 'Workcare', was introduced in Victoria with effect from 1 September
1985. The Workcare scheme was governed by the provisions of the Accident Compensation Act 1985 (Vic). The Workcare scheme had the consequence that, as from 1 September 1985, the Accident Compensation Commission became the sole workers' compensation insurer in Victoria. Employers became liable to pay levies to the Commission pursuant to Part VII of the Accident Compensation Act.
2. The Workers scheme provided, however, for large employers, satisfying particular financial criteria, to be registered as 'self-insurers' pursuant to the Accident Compensation Act. Such registration had two main consequences. First, the employer became exempt from payment of levies pursuant to Part VII. Secondly, the employer became liable directly to compensate employees suffering 'injuries' within the meaning of s.5(1) of the Act.
EVIDENCE
The Applicant submits that, on the evidence, the following findings of fact should be made:-
3. The Applicant became, with effect from 1 September 1986, a 'self-insurer' for the purposes of the Accident Compensation Act (Exhibit DCC2). Accordingly the Applicant was not obliged under that Act to pay levies pursuant to Part VII. Furthermore it became liable to meet its own liabilities to injured employees arising pursuant to that Act.
4. As at the end of the 1986 year of income (the Applicant's tax year ending on 30 September 1986), there were two categories of liabilities incurred by the Applicant in respect of Workcare claims or potential Workcare claims not then concluded (affidavit of Mr Coull, 17.2.92, para. 8):- a) claims reported but not paid - that is, claims for compensation which had been notified by workers to the Applicant, but which were unresolved and unpaid as at the end of the year of income;
b) claims incurred but not reported - that is, claims which had not been notified by injured workers to the Applicant as at the end of the year of income.
5. Necessarily, liabilities in respect of both of those categories of claim had to be estimated. It was impossible, as at the end of the 1986 year of income, to ascertain the precise amount of the liabilities.
6. Estimates were made in the manner described below. In its income tax return for the year ended 30 June 1986, the Applicant claimed a deduction in the total amount of $779,594 in respect of such estimates, that amount being made up of:-
Claims reported but not paid $623,675 Claims incurred but not reported $155,919 TOTAL $779,594 Exhibit A, p 22 and p 25.
7. The Commissioner subsequently issued an assessment dated 30 March 1987 (Exhibit A, p 33). It was accompanied by an adjustment sheet (Exhibit A, p 34) which indicated that there had been disallowed 'claims under Workcare' in the amount of $779,594. The Applicant lodged a Notice of Objection against the assessment, which included an objection against the disallowance of the Workcare claim (Exhibit A).
8. The method adopted by the Applicant for the purpose of making estimates of liabilities in respect of both claims reported but not paid and claims incurred but not reported, is described in the affidavit of Mr Coull (17.2.92 para. 9, and paras.13-20). The procedure was as follows:- a) Mr Jubb, the Accident Compensation officer of the Applicant (being a person with 20 years' previous experience in workers' compensation insurance) received each workers' compensation claim on behalf of the Applicant (17.2.92, para. 7); b) Mr Jubb, upon receiving a claim, made an estimate in respect of the liability of the Applicant to that claimant (Transcript p 44.2);
c) Mr Coull and Mr Jubb considered the larger claims for the purpose of estimating the total liability of the Applicant for that year for the purpose of including an amount in the Applicant's accounts (17.2.92, paras. 13 and 15, Transcript p 44.3-44.5); d) the Administrative Guidelines provided to the Applicant by the Department of Management and Budget required that the 'employer is required to have the workers' compensation liability assessed at intervals of not more than 12 months by an approved actuary' (Exhibit DCC6 at p 10);
e) Mr Coull and Mr Jubb met with the actuaries for the Applicant, Towers Perin Forster and Crosby ('Towers Perin') for the purpose of complying with this requirement and for the purpose of obtaining external advice as to the appropriate estimate for its accounts. Mr Coull provided Towers Perin with a copy of a claims listing for the period 1 September 1985 to 31 August 1986, together with claims data supplied by Royal Insurance Limited, the Applicant's prior workers' compensation insurer, for the period September 1983 to September 1985 (17.2.92, para. 13- 15);
f) Towers Perin, on the basis of the material provided, verbally advised Mr Coull in late September 1986 that $751,000 would be a reasonable estimate. A detailed letter of confirmation to that effect followed on 6 March 1987 (17.2.92, para. 14, and Exhibit DCC7). That estimate related to the period 1.9.85 to 31.8.86. g) Mr Coull subsequently made a further estimate for the purpose of the preparation of the accounts for the period ending 30.9.86. Mr Coull did so in the following manner (17.2.92, para. 15);- i) firstly, by running a claims listing as at 30 September 1986 (Exhibit DCC8), and considering the total 'current estimate' amount set down as an estimate of claims reported but not paid; ii) secondly, by adding to that amount an amount of 25% thereof as an estimate for claims incurred but not reported. The 25% figure was suggested to Mr Coull by Mr Wilson, an account executive of Reed Stenhouse, during a telephone conversation in September 1986. Mr Wilson's evidence was to the effect that the workers' compensation insurance industry adopted a figure of 25% of claims reported but not paid as an appropriate indicator of claims incurred but not reported, and that this figure was consistent across different industries despite the fact that the rate of claims might vary from one industry to another (Transcript p 49.2). Mr Coull arrived at a total estimate of $779,594, representing $623,675 in respect of claims reported but not paid and $155,919 in respect of claims incurred but not reported. The method utilised by Mr Coull was the same as the method found to be acceptable in RACV Insurance Ltd v. Federal Commissioner of Taxation (19750 VR 1, at 5; h) Mr Coull's estimate was the figure included in the Applicant's accounts for the year ended 30.9.86 (17.2.92 para. 16, and the affidavit of Mr Burroughs 12.10.92).
9. With respect to the circumstances in which the Applicant sought to make estimates of its liabilities in respect of claims reported but not paid, the situation can be summarised as one in which:
a) the number of claims was known;
b) the nature of the injuries suffered in respect of each claim was known;
c) the range of benefits payable pursuant to the Accident Compensation Act (s.92 to s.100) was ascertainable, having regard to the known salaries of the claimants.
10. Having regard to those known factors, the amount which would ultimately have to be paid in respect of each claim, and in respect of the totality of known claims, was capable of reasonable estimation.
11. Subsequent experience demonstrated that the estimates made by the Applicant as at the end of the 1986 year of income in respect of liabilities for both claims reported but not paid, and claims incurred but not reported, were less than the liabilities which actually had to be discharged in later years (affidavit of Mr Coull 17.2.92 para. 17, 19.6.92 para. 8).
Total amount paid as at Total provision in 10 December 1991 for claims 1986 Accounts for 'reported but not paid': claims 'reported but $2,089,722 not paid': $623,675 Total amount paid as at Total provision in 10 December 1991 for claims 1986 Accounts for 'incurred but not reported': claims 'incurred but $230,066 not reported': $155,919
12. The fact that the estimates made were significantly less than the amounts ultimately paid out does not detract from the conclusion that the liabilities were capable of reasonable estimation. If any finding of fact is open on the basis of the discrepancy, it is merely that the Applicant's officers in fact underestimated the liabilities - i.e. that they failed to make sufficient estimates on the basis of the information available to them. Shortcomings in the making of the estimates is a quite different matter from the question as to whether the liabilities were capable of reasonable estimation - and any such shortcomings do not support a finding that the liabilities were not capable of reasonable estimation.
13. The Applicant was obliged in preparing its accounts for the year of income to account for liabilities in respect of both claims reported but not paid, and claims incurred but not reported - s.146(4) of the Accident Compensation Act 1985, and Exhibit DCC6, p 6.
14. By its application for approval as a self-insurer, the Applicant undertook 'to make provision in its accounts for current, non current liabilities in respect of its workers' compensation liabilities to employees' (Exhibit DCC1).
15. The guidelines issued by the Department of Management and Budget stated that 'it will be the responsibility of a self-insurer to place an estimate of the expected claim payments and recoveries on each new claim and to review the estimates on a periodic basis. The frequency of the review is to be determined by the self-insurer but shall be carried out at no less than 6 monthly intervals' (Exhibit DCC 6 at p 2).
16. The Applicant disclosed as a liability in the Balance Sheet to its 1986 Accounts, under the heading 'Other provisions', a provision in the amount of $3,451,000 for workers' compensation (Exhibit PMB2 at p 34). That amount incorporated the estimated liabilities of $779,594 in respect of the two categories of claims under the Accident Compensation Act.
17. Proper accounting practice required that self-insurers, such as the Applicant, take into account in each year of income claims reported but not paid and claims incurred but not reported on the basis that these claims represent 'liabilities' that were required to be recognised in that year of income.
18. The evidence of Mr Burroughs was that:- a) liability for both claims reported but not paid and claims incurred but not reported was provided for in the 1986 accounts (paragraph 14 of his affidavit); b) the existence of a worker's compensation claim or potential claim gave rise to a 'liability' in accordance with accepted accounting practice (paragraphs 17 and 18);
c) the Approved Accounting Standard AASB1023 now requires that liabilities in respect of insurance claims be accounted for in a manner consistent with s.146(4) and
(5) of the Accident Compensation Act (paragraphs 21 and 22);
d) there is no difference between the way in which in an insurance company should account for such claims, and the way in which a self-insurer such as the Applicant should account (paragraph 20).
19. The evidence of Mr Lamble was that:-
a) amounts payable in the future in respect of claims reported but not paid, and claims incurred but not reported, constitute 'liabilities' within the meaning of that concept as defined in Statement of Accounting Concepts SAC4 (paragraphs 7 and 8, affidavit 14.10.92);
b) AASB1023 requires that insurance companies provide in their accounts for liabilities in respect of both claims reported but not paid, and claims incurred but not reported (paragraph 9, affidavit 14.10.92); c) while the provisions of AASB1023 do not, in terms, apply to self-insurers, it is accepted accounting practice that self-insurers must account for liabilities in respect of outstanding claims in the same way (paragraph 10, affidavit 14.10.92); d) while those accounting standards did not exist in 1986, recognised accounting practice at that time was to the same effect (paragraph 14, affidavit 14.10.92). SUBMISSIONS ON THE LAW
THE ACCIDENT COMPENSATION ACT 1985 (VIC)
(Tab 1 in the Applicant's folder of Authorities)
1. Section 143 of the Accident Compensation Act provides as follows:-
'Where a worker or a worker's dependants are entitled to compensation under this Act and the worker's employer was, at the time of the injury - a) a body corporate that was at that time a self-insurer; or
b) a body corporate that was at that time a subsidiary of a self-insurer - the first-mentioned body corporate is, subject to section 151, liable to pay the compensation.' (Emphasis added)
2. The effect of that section was to impose upon the Applicant the liability to pay compensation to which injured employees became entitled pursuant to the provisions of the Act.
3. Section 82(1) and (2) of the Accident Compensation Act provide as follows:-
'(1) If there is caused to a worker an injury arising out of or in the course of any employment the worker shall be entitled to compensation in accordance with this Act.
(2) If there is caused to a worker an injury arising out of or in the course of any employment which results in or materially contributes to the death of the worker the worker's dependants shall be entitled to compensation in accordance with this Act.' The expression 'injury' is defined in s.5(1) of the Act.
4. The effect of those subsections was that entitlement to compensation arose at the time of occurrence of the relevant injury (or death, in the case of s.82(2)).
5. Section 101(1) provides that a person would not be entitled to recover compensation unless notice of the injury was given to the employer. However, s.101(2) deems the giving of the relevant notice in the event that a claim for compensation was made.
6. Section 102 deals with the form of notice to be given. Section 103 deals with the form of the claim to be made.
7. Section 109(4) provides for a self-insurer to either accept or dispute liability to a claim for weekly payments. Section 109(6) provides for a disputed claim to be considered by a Conciliation Division of the Accident Compensation Tribunal.
8. Sections 116 and 117 provide for the reference of disputed claims to be dealt with by, initially, a Conciliation Division of the Tribunal, and subsequently a Tribunal Division of the Tribunal. The powers and procedures of the Tribunal with respect to such matters are dealt with in s.57 to s.80 inclusive of the Act.
9. Sections 92 to 100 inclusive deal with the benefits provided for under the Act. Sections 93 and 94 provide for the provision of benefits in the form of weekly payments. Sections 92 and 98 provide for the payment of benefits in a lump sum. Section 99 provides for compensation in respect of medical expenses incurred by an injured worker.
10. The provisions of the Accident Compensation Act, and in particular s.82 and s.143, have the consequence that liability on the part of the Applicant to compensate injured employees arose at the time at which the employee suffered the injury. The existence of that liability was recognised by the Accident Compensation Act in s.146(4) and (5), which provide as follows:-
'(4) For the purposes of an assessment under sub-section
(5), the body corporate shall -
a) make provision in its accounts for current, non-current and contingent liabilities in respect of injuries or deaths referred to in that sub-section; and
b) permit an actuary approved by the Minister to inspect the books of the body corporate.
(5) In this section, a reference to the assessed liability of a body corporate is a reference to - a) the amount assessed, in accordance with the guidelines approved by the Minister, at intervals of not more than one year by an actuary approved by the Minister as the sum of the actuarial value of the current, non-current and contingent liabilities of the body corporate and, if the body corporate is a holding company, of each of its subsidiaries at the date of the assessment and the estimated value of such liabilities at the expiration of 12 months after that date, being liabilities in respect of injuries or deaths incurred or suffered by workers employed by it or its subsidiaries during the period during which the body corporate is a self-insurer and which entitled a worker or the dependent of a worker to compensation whether under this Act, at common law or otherwise and whether or not a claim for compensation has been made; or b) $3 000 000 -
whichever is the greater.'
11. Those provisions made it clear that the Applicant was required to make provision in its accounts for both claims reported but not paid, and claims incurred but not reported. They confirm that the consequence of s.82 and s.143 is to crystallise liability at the time of occurrence of an injury.
12. The evidence of the two accountants (Mr Burroughs and Mr Lamble) was to the effect that accounting practice and accounting standards are to the same effect as s.146(4) and
(5) - see paras. 18 and 19 above.
THE MEANING OF 'INCURRED' IN s.51(1)
13. It is not in dispute that liabilities of the Applicant in respect of claims made against it under the Accident Compensation Act 1985 are deductible for income tax purposes pursuant to s.51(1) of the Income Tax Assessment Act 1936. The matter in dispute is a timing issue - namely, when those amounts are deductible. The resolution of that issue turns upon the meaning of the word 'incurred' in s.51(1) of the Assessment Act.
14. In New Zealand Flax Investments Limited v. Federal Commissioner of Taxation (1938) 61 CLR 179, Dixon J commented upon the meaning of the word 'incurred' in the following terms (at 206-7):-
'For the purpose in hand I think, that sec.23(1)(a) must be the source in which the company must seek authority for the deductions. 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.
In the present case I regard the obligation to pay interest to bond-holders who, within the four years from the date of issue, paid up the amount of the bonds, as a definite liability contingent only on the bondholders meeting their instalments, that is, in the case of bonds subscribed for in or before the respective accounting periods the subject of the assessment.'
15. That test was said by Barwick CJ in Nilsen Development Laboratories Pty Limited v. Federal Commissioner of Taxation
(1981) 144 CLR 616, as one which should be 'carefully perused and applied' in that case (at p 623).
16. As liability to compensate injured employees arises at the time of injury, it is clear that such liabilities are more than 'impending, threatened or expected'.
17. In Federal Commissioner of Taxation v. James Flood Pty Limited (1953) 88 CLR 492, there were laid down tests which have been considered and applied in almost all subsequent cases concerned with the meaning of the word 'incurred'. The Court stated as follows (at 506):-
'The word "outgoing" might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word "incurred", the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement ... For under our law the facts must satisfy the expression "losses and outgoings incurred". These words perhaps are but little more precise than the word "established" or the expression used above "definitively committed". But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible.' (Emphasis added.)
18. The Court also indicated that a critical issue was determining the point at which legal liability arose (at 507-8):-
'It is one thing, however, to say that it is not necessary, for the purposes of s.51(1), that an actual disbursement should have taken place. It is another thing to say that in the present case the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the ensuring accounting period by employees whose service had not as yet qualified them for annual leave. In respect of those employees there was no debitum in praesenti solvendum in futoro. 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.'
19. Applying those tests in the present case, having regard to the provisions of the Accident Compensation Act it could only be said that, from the time at which the injury to the employee occurred:-
a) the Applicant was, by virtue of the terms of the Accident Compensation Act, definitively committed to compensate the employee; and
b) there existed a present liability which would have to be discharged at a future time - i.e. situation could be accurately described as debitum in praesenti, sovendum in futuro.
Following the occurrence of an injury to an employee there was no further act or matter, yet to occur, the occurrence of which was necessary to crystallise the liability of the Applicant.
20. Nilsen Development Laboratories Pty Limited v. Federal Commission of Taxation ((1981) 144 CLR 616) was concerned with the time at which liability to long service leave and annual leave was 'incurred' by an employer. As in James Flood, it was held that no liability was incurred until the time at which the employee took the leave (or ceased employment). Barwick CJ stated as follows (at pp 623-4):- 'In my opinion, the language of Dixon J in New Zealand Flax investments Ltd v. Federal Commissioner of Taxation ((1938) 61 CLR 179, at p 207) needs to be carefully perused and applied. 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) 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 (supra) which presently needs emphasis is that the work "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".'
Gibbs J stated as follows (at pp 627-8):- 'The principle to be applied in deciding whether a loss or outgoing as "incurred" is clear enough. 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
((1938) 61 CLR at p 195).
If these principles are applied to the present case, the question is whether the taxpayer was under a present liability to make a payment to its employees in respect of leave. The answer is that it was not. The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all.' Mason J agreed with the reasons given by Barwick CJ (at p 630). However, his Honour additionally made comments indicating agreement with the results in three cases considered below (RACV Insurance Pty Limited v. Federal Commissioner of Taxation (1975) VR 1, Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation
(1977) 77 ATC 4151, and Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation (1977) 77 ATC 4186). His Honour stated (at p 616):- 'I agree with the Chief Justice's comment on the observations of Dixon J in New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation
((1938) 61 CLR 179, at 207). And I do not understand RACV Insurance Pty Ltd v. Federal Commissioner of Taxation ((1975) VR 1) to have decided otherwise. There, Menhennitt J held that the taxpayer, an insurance company, was entitled to deduct as a loss or outgoing under s.51 an amount reasonably estimated to be the total amount which it would have to pay in respect of its liability to indemnify insured drivers against claims by third parties incurred, but not reported, during the year of income. The estimate was made in respect of accidents occurring in that year which gave rise to liability under policies then in existence. Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation
((1977) 77 ATC 4186) falls into the same category. See also Commonwealth Aluminium Corporation Ltd. v. Federal Commissioner of Taxation ((1977) 77 ATC 4151) where the taxpayer completely subjected itself to liability to pay royalties.'
21. The emphasis in those judgments is on identification of a presently existing liability. That did not exist in the Nilsen case because 'the event on which the entitlement of the employees to payment depended had not occurred' (at p 628). It is different in the present case. The only event upon which entitlement to receive compensation depended was the occurrence of an injury, and that had occurred. Thus, liability on the part of the Applicant was complete, although not yet discharged. ESTIMATING LIABILITIES
22. It has been recognised by the Courts that the mere fact that the quantum of a liability cannot be precisely ascertained does not prevent the taxpayer from claiming a deduction - i.e. it does not have the consequence that the liability is not 'incurred'. That was recognised by Dixon J in the Texas Company (Australasia) Limited v. Federal Commissioner of Taxation (1940) 63 CLR 382, at 465-6, where his Honour stated as follows:-
'For where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense, and where the continuous course of a business is divided for accounting purposes into closed periods it is a reduction of the net profit, which otherwise would be calculated for the period.'
23. In Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation (1977) 77 ATC 4151, the Commissioner argued that liability to pay mining royalties had not been 'incurred' by the taxpayer in circumstances where the validity of the legislation imposing the royalties was challenged, and as at the end of the year of income the precise amount of the royalty could not be calculated. Newton J nevertheless held that liability had been 'incurred'. His Honour stated as follows (at p 4160-61):- 'For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss or outgoing which has been "incurred" within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation: see Texas Company
(Australasia) Ltd v. F.C. of T. (1940) 63 CLR 382 at pp 465-6 per Dixon J; and RACV Insurance Pty Ltd v. F.C. of T. 74 ATC 4169 at pp 4176-77;
(1975) VR 1 at pp 8-9 ... In this context I think that the quantum of a liability is "capable of reasonable estimation", if it is capable of approximate calculation based on probabilities: see para. 2 of the definitions of the noun "estimate" in the Shorter Oxford Dictionary 3rd ed. (1950); see too J.J. Savage and Sons Pty Ltd v. Blakeney (1970) 119 CLR 435 at p 442. The authorities also show, in myopinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible: see Flood's case at pp 506-7.'
24. Two parts of the passage quoted from the judgment of Newton J require emphasis:-
a) the liability the quantum of which cannot be precisely ascertained will be deductible 'provided that it is capable of reasonable estimation'; and
b) such liability is capable of reasonable estimation if it is 'capable of approximate calculation based on probabilities'.
25. It is submitted that those requirements were satisfied in the present case. Those statements, and the manner of application of the tests as demonstrated in RACV Insurance v. Federal Commissioner of Taxation (supra), and Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation (supra), show that it is erroneous to demand a high level of exactitude from a taxpayer before it will be said that a liability is 'capable of reasonable estimation'. Having regard, in the present case, to the matters known to the Applicant in respect of claims reported but not paid (p 6, para. 9 above), it is clear that liabilities in that category were at least potentially capable of as accurate estimation as the liabilities for incurred but not reported claims in the RACV and Commercial Union cases.
26. It must also be appreciated that in the RACV case the deduction in respect of claims incurred but not reported was allowable as at the end of the year of income, although the relevant estimates were only made at later dates. At that time, details of the potential claims were necessarily unknown. The liabilities were less capable of estimation than the claims reported but not paid in the present case. However that matter did not prevent the allowance of a deduction.
INSURANCE CASES
27. The decision of Menhennitt J in RACV Insurance Pty Limited v. Federal Commissioner of Taxation (supra) is of considerable significance to the present case. That case concerned a claim for a deduction by an insurance company in respect of claims incurred but not reported as at the end of the year of income, arising out of its compulsory third party motor vehicle insurance business.
28. The amount estimated by the taxpayer in that case with respect to its liability for claims incurred but not reported was, for the purposes of its annual accounts, estimated on a statistical basis (at p 5.5). However, by the time the income tax return came to be prepared, information was available as to a number of claims subsequently made which had not been reported as at the end of the year of income. Accordingly, for the purpose of determining the estimated liability on claims incurred but not reported as at the end of the year of income for inclusion in its income tax return, the taxpayer adopted the following procedure:-
a) it identified the claims subsequently made which were in the 'incurred but not reported' category as at the end of the year of income;
b) it made an estimate, on a case by case basis, of its probable liability in respect of such claims. Thus the taxpayer came up with a total estimated liability of approximately $1.4 million.
29. The evidence of Mr Coull in the present case is to the effect that the Applicant used the same technique to estimate its liability as at the end of the 1986 year of income in respect of claims reported but not paid. The conclusion at which his Honour arrived in the RACV case was that the estimate was 'quite inadequate' to cover the taxpayer's total liabilities (p 6.5). However, that did not stand in the way of the taxpayer being allowed a deduction in respect of the estimated liability.
30. The Commissioner's primary submission in the RACV case was that no amount was a loss or outgoing incurred by the taxpayer in the year of income, 'unless the liability of the insurance company to indemnify the insured has been quantified by either a settlement of the claim or a judgment or order' (at p 6.5). The argument put on behalf of the Commissioner was thus inconsistent with the basis upon which the taxpayer was assessed (i.e. by allowing to the taxpayer in that case a deduction in respect of claims reported but not paid). The Commissioner's primary submission was ejected (at p 8-9, and p 15). His Honour stated as follows (at p 8-9):-
'When there has to be considered the question whether an insurance company has incurred a loss or outgoing in a particular year that question comes to be considered in relation to the nature of the business being carried on. The essence of insurance business is that, in respect of each class of risk insured against, the insurance company aims to satisfy its liabilities to the policy holders who actually experience the risk primarily out of the total of the premiums paid by all the policy holders, most of whom normally do not experience the risk. In relation to liability insurance the insurance company is bound to indemnify its insured against his liability to a third person. Once events have occurred out of which a liability to indemnify an insured arises, it appears to me that within the meaning of s.51(1) of the Income Tax Assessment Act a loss or outgoing has been incurred. Events have occurred which have subjected it to a liability to indemnify its insured against his liability to a third person and the extent of that liability is capable of reasonable estimate. Where there is no real question of the liability of the insured to the third party and the only question is one of estimating damages, the fact that the quantum of the loss or outgoing is a matter of estimate and that the amount may have to be adjusted in the light of later events does not stand in the way of it being a loss or outgoing (see New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 179, at p 199; ALR 1, and Texas Co.
(Australasia) Ltd v. Federal Commissioner of Taxation, supra, at (CLR) pp 465-6) and in a case where the liability of the insured to the third party is in issue but the amount which is likely to be payable can be reasonably estimated, it is still I think true to say that within the meaning of s.51(1) a loss or outgoing has been incurred by the insurance company. In Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation (1951) 82 CLR 364; (1951) ALR 603, Fullagar, J, said at (CLR) p 369:- "It is common ground that the account must, almost of necessity, proceed upon an 'accrual' or 'earnings' basis. It is the appropriate figure for book debts that is in question. This is in essence a matter of estimation, and (apart from express provision in the Act) it would be proper to make an allowance for bad and doubtful debts. In Sun Insurance Office v. Clark (1912) AC 443, at p 454; (1911-13) All ER Rep 495, Lord Loreburn said: 'There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case." The passage I have referred to in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation, supra, also leads to the conclusion that where an adjustment of an estimate is necessary in the light of later events it is permissible to take the amount of the adjustment into account in the year when it is made.
The conclusions I have stated are, I think, reinforced by the consideration that under s.51(1) a loss or outgoing is a deduction to the extent to which it is incurred in gaining or producing the assessable income. The liability to indemnify in respect of events occurring in the year of income is, it seems to me, properly to be regarded as incurred in gaining or producing the assessable income of that year because it is out of that year's premiums that the liability is to be met.'
31. Crucial to his Honour's conclusion was that events had occurred 'which have subjected it to a liability to indemnify its insured' - i.e. a motor vehicle accident had occurred giving rise to a potential claim. In the present case the critical matter is the occurrence of an injury to an employee. That is the only event which may give rise to liability to compensate an employee. There is no later event which will occur, the occurrence of which is necessary to crystallise liability. Thus liability is complete at the time of occurrence of the injury.
32. The basis upon which his Honour distinguished the decision in Flood's case is explained at p 12.3. Unlike Flood, his Honour noted that 'once the events have occurred which give rise to a liability to indemnify it seems to me that, within the meaning of the passage I have cited, a loss or outgoing has been encountered, run into or fallen upon' (at p 12.5). The result in Nilsen Development Laboratories is, of course, distinguishable on the same basis, and, as has already been noted, Mason J in Nilsen (144 CLR at 632) accepted the correctness of the result in RACV.
33. In RACV, accounting issues were regarded as relevant but not critical. His Honour thought it proper 'to have regard to the long established practice of insurance companies of including among losses in each year's accounts the estimates of liabilities' (at p 13.9). The accounting practice 'reinforces the conclusion' that the amounts of the estimates were losses and outgoings incurred. His Honour discussed (at p 14.7) the relevance of the requirements under the Insurance Act 1973 with respect to the disclosure of liabilities in the taxpayer's accounts.
34. The Commissioner put forward an alternative argument to justify the disallowance of a deduction solely in respect of the claims incurred but not reported as at the end of the year of income. That argument was dismissed in the following terms (at p 16):-
'The Commissioner advanced an alternative submission in relation to the amount directly involved in the appeal, namely the sum of $1,420,424 claimed as unreported claims or as claims incurred but not reported. The submission was that even if the Commissioner's main submission were not accepted no amount should be allowed until the taxpayer has had notice of a claim and that accordingly as none of the accidents in respect of which these amounts were claimed had been reported to the taxpayer in the financial year in question nothing should be allowed as a deduction in respect of this item. I have concluded that in respect of compulsory third-party
insurance claims a loss or outgoing is incurred by the authorised insurer when the events occur which impose on the authorised insurer a liability to indemnify the driver of the vehicle in respect of a claim by a third person for personal injury. Having regard to the fact that there is an unanswerable liability to indemnify the driver of the vehicle once the personal injury occurs, it seems to me that a loss or outgoing is incurred within the meaning of s.51(1) of the Act once the events giving rise to a liability occur and that the incurring of the loss or outgoing is not dependent on notice of the injury or of the accident or upon a claim being made by the driver for indemnity.'
35. His Honour concluded by approving the basis upon which the taxpayer had made estimates of its liability (at p 17):- 'In the result it appears to me that the taxpayer is entitled to claim a deduction in respect of the claims incurred in the year of income but not reported. The question remains as to the appropriate amount to be included. In its annual accounts the taxpayer included a statistical estimate of $1,320,000 upon the basis I have referred to. Mr Hawkins the actuary said that in his opinion this was a reasonable estimate in the circumstances of the taxpayer at that time. By the time it lodged its return the taxpayer had made estimates case by case of the claims by then reported and arising out of events happening in the year ended 28 February 1971 and this is the amount it claimed in its return, namely, $1,420,424. I am satisfied on the evidence that this amount represented the total of reasonable estimates of the taxpayer's liability in respect of claims of which it in fact had notice by that date. It seems to me in principle that events after the close of a financial year can be relied upon to support a case by case estimate in substitution for an earlier statistical estimate made at the time of its published accounts on the basis that the later estimate is more accurate than the earlier one. As to the adequacy and reasonableness of the estimate of $1,420,424, the evidence is that the amount claimed is more than justified.'
36. The decision in RACV case was not challenged by the Commissioner in Commercial Union Assurance Co of Australia Limited v. Federal Commissioner of Taxation (1977) 14 ALR 651, at 653.5. Rather, the Commissioner sought to distinguish it on three bases. The first basis was that many of the insurance policies issued by members of the Commercial Union Pool contained conditions requiring the giving of notice of the occurrence of an event insured against to be given to the insurer within a specified time (p 659.8). That does not arise in the present case, having regard to the deeming effect of s.101(2) of the Accident Compensation Act.
37. The second basis relied upon by the Commissioner for distinguishing the result in RACV turned upon the method adopted to adjust claims from year to year so as to prevent the doubling up of deductions (p 663.2). That issue does not arise in the present case because, as in RACV, the year of income is the first year in which liabilities arose which were claimed as deductions (p 665.9).
38. The third basis upon which the decision in RACV was sought to be distinguished concerned claims which arose in a prior year of income (p 666.2).
39. The method of estimation utilised in Commercial Union was explained at p 657-8. It was noted that the method utilised resulted in a substantial underestimate of liabilities (p 657.4). However, that matter did not stand in the way of allowability of a deduction.
40. The insurance cases demonstrate that liabilities of the type in issue here have, in the past, been found by the Courts to be capable of reasonable estimation. Consistent with the decisions in RACV Insurance and Commercial Union, the appropriate conclusion in the present case is that the liabilities of the Applicant with respect to claims under the Accident Compensation Act were capable of reasonable estimation."5. The Respondent's Submissions on the Workcare Issue read as follows:
"1. The Respondent accepts much that is found in the Applicant's submissions on WorkCare. However the Respondent
(a) contest the assertion in para. 4(p 2) that the two categories of liabilities referred to were 'incurred by the Applicant';
(b) contests the assertions in para. 10 (p 6) and para. 12 (p 7) to the effect that the amounts which might be paid were capable of reasonable estimation;
(c) contends that the summary of evidence in paras. 18 and 19 (pp 8-9) is incomplete and fails to note that accountants record many matters as liabilities which are incapable of being an allowable tax deduction;
(d) contests the assertions in para. 4 (p 11), para. 10 (p 11), para. 16 (p 14), para. 19 (p 15), para. 21 (p 18) and para. 31 (p 23) to the effect that the liabilities which are the subject of the provision (and claim for tax deduction) were complete at the point of injury;
(e) contests the assertions in para. 25 (pp 19-20) and para. 29 (p 21) that the future amounts payable were capable of estimation, and the assertion that the claims by ANZ were 'of the type' (para. 40 - p 25) previously found by the Courts, (e.g. in the RACV Insurance Ltd case and the Commercial Union case) to be capable of reasonable estimation. A. The claim for deduction
2. The Australia and New Zealand Banking Group Limited ('the ANZ') claims that in its year of income ended 30 September 1986 it is entitled to a deduction under section 51 of the Income Tax Assessment Act 1936 ('the ITAA') for the amount it has provided in accordance with
its obligation as a self-insurer
under the Accident Compensation Act (Vic) 1985 ('the ACA'). The claim can be followed through the various schedules attached to the ANZ's income tax return for the 1986 year of income. In the detailed profit and loss account marked as schedule 2.1 there is shown under the heading 'Charges' items of expenditure described as 'Branches, State Administrations and GHQ Administration' an amount of $1,043,302,216. A more detailed breakdown of that amount is found in the document headed 'Analysis of charges account - Australia' marked as schedule 2.2 showing a claim of a deduction for 'Workers Compensation' (including provision $231,872) of $1,372,657. That amount, in turn, is further explained in schedule 4.1.
3. Schedule 4.1 describes the 'movements in provisions and reserves' of the ANZ's operations in Australia. It shows a provision for Workers Compensation at the commencement of the 1986 year of income of $3,218,740. At the end of the 1986 year of income the provision has increased by $231,872 being the amount of increase specifically noted in schedule 2.2. Included in the total amount of $3,450,612 shown as the provision for Workers Compensation as at the close of the 1986 year of income was an amount of $779,594 described in schedule 9 as 'claims under WorkCare' under the heading 'Other deductible items'. This amount is further broken down and explained in schedule 9.8 headed 'Claims under WorkCare'.
4. It is clear from schedule 9.8 that the ANZ has claimed that it is entitled to a deduction in respect of amounts for which it has been required to make provision in its accounts for the 1986 year under section 146(4) of the ACA. Those amounts are made up of two elements:
(a) claims which have been
reported but not yet paid $623,675
(b) claims which it has incurred but which have not been
reported $155,919 $779,594 In fact it appears from an affidavit sworn 17 February 1992 by David Cordiner Coull that the amount shown as 'Reported but not paid' was in error by $17,356 having inadvertently been included twice. In paragraph 19 of his affidavit he explains how that came about and paragraph 20 of his affidavit shows the correct amount which should have been claimed upon the calculations made by the ANZ as being $757,898 calculated as follows:
(a) claims reported but
not paid $606,319
(b) claims incurred but
not reported at 25%
of the previous amount $151,579 $757,898
5. The provision for claims reported but not paid was calculated by the process described by Mr Coull in his affidavit. It involved estimating the value of future claims against the ANZ which had been reported but not yet paid. The proportion of the deduction claimed for claims said to have been incurred but not yet reported was a simple addition of 25% of the estimated value of the claims reported but not paid. The figure of 25% was chosen as being the insurance industry average for Workers Compensation claims. The estimate was of 'the amounts which
(ANZ) thought (it) would probably have to pay in the future', including weekly payments, medical expenses and that kind of thing T. 44 11. 24-36.
B. Deductibility under Section 51
6. It is common ground between the parties that the claim for deductibility depends upon the provisions of section 51(1) of the ITAA. That section provides:-
'All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domesticate nature, or are incurred in relation to the gaining or production of exempt income.'
The essential issue between the parties in relation to the WorkCare claim depends upon whether the amounts claimed had been 'incurred' during the 1986 year of income.
7. The Commissioner's submission is that ANZ has not shown that the amount of the deduction claimed was a liability incurred by it in the 1986 year for the purposes of section 51(1) because, on the evidence, that amount:-
(i) included, and may have entirely consisted of, amounts for future weekly payments and medical expenses which ANZ was not liable to pay until the passing of the week in respect of which the weekly payments in question fell due or the injured worker incurred the relevant medical expense;
(ii) was not capable of reasonable estimate.
8. An obligation may be incurred for tax purposes though it be payable in the future (as contended on behalf of ANZ in paragraphs 13-21). What is essential to deductibility however, is that the taxpayer be 'definitively committed' or 'completely subjected' to the obligation at the time when the deduction is claimed. The issue was considered in F.C. of T. v James Flood Pty Ltd (1953) 88 CLR 492 in the joint judgment of Dixon CJ, Webb, Fullager, Kitto and Taylor JJ at p 504-508, where their Honours said:- "However serviceable generalized conceptions may be in relieving overburdened assessors an tax accountants of the need of examining particular situations, all a court can decide is that case before it. And as the nature and incidence of the liability in the case before us obviously depends on the provisions of the award it is that instrument we should consider and not the validity of some independent general proposition. Now in delaying with that instrument it is necessary at the outset to observe that under the award an employee may fail to become entitled to annual leave for a number of reasons. He may die, his employment may be terminated because of his own fault, there may be a strike, or he may be guilty of absenteeism and be unable to rely on grounds of exception or excuse. From the employer's point of view there is a further possibility; He may never become liable to give his employees two weeks' leave on full pay because he may sell his business. There is a special provision which places the obligation in such a case upon the purchaser of the business. No doubt in that case the impending obligation would result in a diminution of the price of the business but that is a different thing from discharging the obligation. It may be true that all these reasons which, so to speak, would intercept the accruing right of an employee to be paid by the taxpayer are all of a particular character, but it is difficult to say in the face of them that there is a definite obligation to make a payment, incurred in respect of each completed month on that month being completed. Further, it is to be noted that when the employment of a man is terminated without his fault before he has served twelve months the amount he receives in respect of each completed month of service is not necessarily one twelfth of the full two weeks' pay for annual leave. The two things are calculated at different periods and the rates of pay may not be the same.
A most important feature of the award is that the leave must be taken and that it must be taken at a time which ex hypothesi in this given case falls outside the year of income. 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 payments as something made in respect of the two weeks when leave is actually taken ...
When the employees are considered not individually but collectively it is easy to understand that the taxpayer should say that it was antecedently quite certain, apart from the remote contingency of a change of ownership of the undertaking, that an expenditure on annual leave would be made in the ensuing financial year, and that an almost fixed proportion would be calculated in respect of periods of service falling within the year of income. But to say this is not enough. It shows no more than that part of the regular expenditure incurred in carrying on the undertaking is the payment of wages to men taking their annual leave and that the amount may be computed in advance with approximate accuracy because annual leave depends on twelve months' service. (...)
What losses and outgoings arising in the course of business are to be deducted is a matter which must be governed by section 51(1) of the Income Tax Assessment Act. Under its provisions all losses and outgoings may be deducted to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, provided, of course, they are not of a capital nature or otherwise excluded. The word 'outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word 'incurred', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement. (...)
For under our law the facts must satisfy the expression 'losses and outgoings incurred'. These words perhaps are but little more precise than the word 'established' or the expression used above 'definitively committed'. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible. But it is certainly true that it is not a matter depending upon 'proper commercial and accountancy practice rather than jurisprudence'. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by section 51(1) but it cannot be substituted for the test.
To repeat what has been said before in relation to an analogous provision in the Act of 1992-1934: 'To come within that provision there must be a loss of 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 not more than impending, threatened, or expected.' New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation
(1938) 61 CLR 179, at p 207.'
These principles have been repeated in subsequent cases including Nilsen Development Laboratories Pty Ltd v. F.C. of T. (1981) 144 CLR 616 and Ogilvy and Mather Pty Ltd v F.C. of T. (1990) ATC 4836.
C. The ANZ's obligations under ACA
9. The ANZ was a self-insured under the ACA during the 1986 year of income. As a self-insurer, section 143 of the ACA imposed upon the ANZ the liability to pay the compensation where a worker or worker's dependents were entitled to compensation under the Act. That entitlement was governed principally by Part IV of the ACA which gave entitlements to workers or their dependents upon a injury having arisen out of or in the course of the employment. Section 82(1), for example, gave a worker a right to compensation 'in accordance with this Act' where there is 'caused to a worker an injury arising out of or in the course of any employment'. Sub-section 82(2) conferred the entitlements to compensation upon the worker's dependents where the injury 'results in or materially contributes to the death of the worker'. In each case, however, the 'entitlement to compensation;' is an entitlement 'in accordance with (the) Act', and not otherwise.
10. The benefits which the ACA conferred upon workers or their dependents were those primarily found in Division 2 of Part IV. Section 92 provides for lump sums payable on death, to the dependents of a dead worker. Sections 93 and 94 provide for weekly payments where a worker is totally or partially incapacitated:-
'93. (1) If a worker's total incapacity for work results from or is materially contributed to by an injury which entitles the worker to compensation the compensation shall be in accordance with this section.
(2) Subject to sub-section (3), compensation shall be in the form of weekly payments payable to the worker during the period of total incapacity for work ...
94. (1) If a worker's partial incapacity for work results from or is materially contributed to by an injury which entitles the worker to compensation the compensation shall be in accordance with this section.
(2) Subject to sub-section (3), compensation shall be in the form of weekly payments payable to the worker during the period of partial incapacity for work ...' Section 98 provides for lump sum payments under a table of maims. Section 99 provides for medical expenses:- '99. (1) If there is caused to a worker an injury arising out of or in the course of any employment, the Commissioner or a self-insurer and the employer in respect of the
employer's liability under section 125(1)(a)(iii) shall be liable to pay as compensation -
(a) the reasonable costs of the medical, hospital, nursing, rehabilitation and ambulance services received because of the injury; and
(b) the reasonable costs of burial or cremation where death results from the injury -
which shall be in addition to any other compensation payable under this Act.'
Section 100 provides for indexation of benefits, including weekly payments. Section 119 provides for the method of making weekly payments:-
'119. (4) A weekly payment shall be made to a worker before the expiry of seven days after the end of the week in respect of which it is payable.'
Late payment is an offence (section 119(5)) and gives rise to pecuniary penalties (section 121).
11. Thus an examination of the provisions of ACA shows that benefits are frequently for the payment of weekly amounts during the continuation of incapacity. Provision is also made for payment of medical expenses which have been incurred by a worker. The provisions show that, in the case of weekly payments, entitlement to payment does not arise before the week to which the entitlement relates is entered upon, and that there is no entitlement to payment until after the passing of that week. In the case of medical payments the entitlement only arises when the medical service or treatment has been provided. D. No liability to pay WorkCare payments until further events occur
12. It is contended for the ANZ that:
'In the present case the critical matter is the occurrence of an injury to an employee. That is the only event which may give rise to liability to compensate an employee. There is no later event which will occur, the occurrence of which is necessary to crystallise liability. Thus liability is complete at the time of occurrence of the injury' (para. 31), (p 23); see also para. 4. (p 11), para. 10 (p 11), para. 16 (p 14), para. 19 (p 15), para. 21 (p 18). Thus it is at the heart of the ANZ's case that it is the injury which creates the liability and the liability is complete upon that event. The submission denies any consequence of the nature of the liabilities as being predominantly the payment of weekly payments during a period of incapacity and the payment of medical expenses once incurred by the injured worker in the future.
2. The business of the Applicant Bank in the year of income ending 30 September 1986 (the 'year of income') included the leasing of chattels to customers. The Bank has been carrying on the business of leasing since in or about 1971. This business involves the regular purchase of chattels and the bailment of them to customers of the Bank. When the lease comes to an end the chattels are sold. The purchaser of the chattel may be the bailee or some other person, for example a dealer in chattels of the kind in question, with whom the chattel is traded in. Affidavit Conn para. 3. The Bank does not maintain a fleet of chattels on hand for lease; rather it purchases a chattel identified by the customer and at the customer's request. The method of financing the availability to the customer of that chattel is by way of lease - Conn transcript p 152.5.
3. The most commonly leased types of chattels which were purchased and leased by the Bank in 1986 were:
(a) motor vehicles;
(b) computers;
(c) other office electronic equipment eg photocopiers, telephone systems, facsimile machines;
(d) other equipment for use in businesses eg restaurant cooking equipment, shop fittings;
(e) non-electronic office equipment eg furniture, partitioning materials - Affidavit Conn para. 4.
4. In the relevant year of income ... depreciation cost limit in the relevant year of income. These leases represented assets with a total capital cost of $8,315,816. ..." (The total lease rentals derived by the Bank in 1986 were returned as assessable income) ...
"6. Almost without exception, during the relevant year of income, if a lease of a motor vehicle ran to full term, the vehicle would be sold for a price equal to or less than the residual value specified in the lease. Sometimes the lease was terminated earlier either by default of the customer or by the customer choosing to terminate earlier. In the former case the Bank would usually sell the vehicle at auction. In the latter case the customer would pay the pay out figure calculated in accordance with the lease. In either case the sale proceeds received by the Bank were almost invariably less than the cost of the vehicle to the Bank."16. (During cross-examination of Mr Birch, counsel for the respondent asked the witness whether he agreed with the general description of the applicant's business in relation to leases of luxury motor vehicles given by counsel for the applicant in his opening, namely that there was "neither a nod nor a wink", but that the "lessee would offer and the bank would accept to buy the vehicle for the residual value". The witness agreed and then at page 177 of transcript was asked:
"Well, you could only get a profit if you in fact did what was not contemplated which is, went out and did the tour of the used car dealers and said the residual value is $30,000, will you give me 50 for it. If you did that, you would see a profit?---That's right.
The fact that you did not see a profit suggests that that was never done?---Yes.")17. The submissions continued:
"7. During the relevant year of income leases of luxury motor vehicles entered into by the Bank took the form of the Bank's standard lease documentation. A single lease agreement was used where there was to be a limited number of leases entered into with the customer. A master lease agreement was used to allow authorised signatories of the customer to sign leasing documents avoiding the necessity for execution under common seal. A supplement was incorporated into the master lease agreement from in or about October 1973. These leases are Exhibits JC5. Each of the leases notes that the lessee has no 'right or property or interest in or to the goods' and that he is 'bailee only thereof' (c1.5); clauses 7 and 8 deal with payments to be made by the lessee to the lessor consequent upon termination of the leases. ...
8. When a lease was to be terminated, the pay out figure was calculated by the Lease Accounting Section, advised to the account executive who obtained the termination amount from the customer, and forwarded it to the Lease Accounting Section for processing. Accounting processes were then activated to 'retire' the asset from the accounting system employed to record the assets and known as the 'COBOL Fixed Asset System' ('COFAS'):- Affidavit Conn para. 15.
9. In respect of leases of those motor vehicles, the actual cost of which exceeded the limit on cost price for depreciation imposed by section 57AF of the Income Tax Assessment Act ('luxury motor vehicles') the Bank's practice was to split the capital cost of the leased vehicle into two notional assets both recorded within the COFAS system. The COFAS input sheets received provided details of the cost of the vehicles which had been leased and also identified these two notional assets, namely the depreciable portion of the vehicle (the 'primary asset') and the non-depreciable portion of the vehicle (the 'secondary asset'). The depreciable portion of the vehicle was determined by reference to the limit specified within section 57AF of the Act. On the termination of leases of luxury motor vehicles COFAS termination sheets were received, advising the termination amount received and the termination date of the lease. - Affidavit Birch para. 4. (Exhibit 'RNB2' to the Affidavit of Mr Birch is a true copy of a form of COFAS termination sheet, completed by way of example only.) ...
11. ... On termination of a lease of a luxury motor vehicle, the sale proceeds were apportioned between the notional primary and secondary assets recorded in COFAS. This has been illustrated by reference to two luxury motor vehicles the leases of which were terminated during the year of income being Vehicle No. 040-V2937 which appears on page 191 of Exhibit 'RNB3' and page 352 of Exhibit 'RNB4' and Vehicle No. 040-N2366 which appears on the first page of Exhibit 'RNB3' (which is page 110) and page 345 of Exhibit 'RNB4'. Exhibit 2 is a schedule illustrating how the Applicant Bank calculates the loss it has claimed pursuant to Section 59(1) of the Act and the deduction it has claimed under Section 51(1) to the Act in relation to the notional primary and secondary assets in relation to Vehicle No. 040-V2987. Exhibit 3 is a schedule illustrating how the Applicant Bank calculates the income pursuant to Section 59(2) and the deduction claimed under Section 51(1) of the Act in relation to the notional primary and secondary assets in respect of Vehicle No. 040-N2366 - see Affidavit Birch para. 9."18. Counsel for the applicant pointed out:
"It should be noted that Mr Birch's evidence makes it clear that the same respective 'loss claimed' as appears at the foot of the first page of each of those Exhibits would have been achieved in each case if the asset (vehicle) had not been notionally split into two for the purposes of the COFAS accounting system - transcript 169-170."19. The applicant's submissions continued:
"12. On the last page of Exhibit 'RNB4' is an item described as revenue gross profit/loss in the amount of $800,635.00. This was calculated as the total loss on the sale of the leased luxury motor vehicles the leases for which terminated during the year of income. However, three vehicles which are listed in the schedule namely Nos. 040-N3923, 040-T0066 and 040-T0070 (which appear on pages 346 and 352 of Exhibit 'RNB4') were incorrectly included in the schedule. These terminations relate to an earlier year. After excluding these assets the total amount of loss incurred by the Bank on the sale of leased luxury motor vehicles during the year of income claimed pursuant to section 51(1) of the Act is the sum of $772,411.00. That is the total amount which the parties agree is now in issue in these proceedings."20. By section 17 of the Act the applicant was liable to pay tax upon its "taxable income", which is defined in section 6(1) as "the amount remaining after deducting from the assessable income all allowable deductions."
21. Before section 57AF was introduced into the Act, a taxpayer carrying on the business of leasing motor vehicles, in the manner adopted by the applicant, would have been entitled to claim depreciation at the prescribed rate in respect of the whole of the purchase price of each vehicle. On the disposal of the vehicle by the taxpayer at the end of the period of the lease the operation of section 59 of the Act would have produced the result that if it received an amount larger than the depreciated value of the vehicle, the excess would have been treated as assessable income (to the extent that a deduction had been allowed) and if it received less than the depreciated value it would have been entitled to a deduction in respect of the difference. In these circumstances there would have been no room for the operation of s.51(1).
22. The first two sub-sections of section 57AF provide:
"(1) This section applies in relation to a unit of property (other than an excluded unit of property) being -
(a) a unit of property in respect of which depreciation is allowable under this Act; and
(b) a motor vehicle (including a vehicle known as a four wheel drive vehicle) that is a motor car or station wagon.
(2) Where the cost of a unit of property to which this section applies for the purpose of calculating the depreciation allowable to a taxpayer under this Act in relation to a year of income would, apart from this subsection, exceed the motor vehicle depreciation limit in relation to the year of income (in this subsection referred to as the 'year of first use') in which the unit of property was first used by the taxpayer (whether for the purpose of producing assessable income or otherwise), then, for the purpose of calculating the depreciation allowable under this Act to the taxpayer in relation to the year of income, the cost of that unit of property shall be deemed to be the amount of the motor vehicle depreciation limit in relation to the year of first use."23. As was pointed out in the respondent's written submission
"The effect of these provisions is to limit the amount of depreciation that may be claimed in respect of a motor vehicle. The limit is not imposed by reducing the rate of depreciation that may be claimed, but rather, by imposing a maximum amount that may be the subject of a claim for depreciation in respect of motor vehicles. That amount is calculated by reference to a formula in the subsections which follow those set out above."24. In its final written submissions the applicant said that the assets in question in this case are not fixed capital assets of the taxpayer's business, nor are they trading stock. "They are, in a sense, 'revenue' assets. The cost of the asset is not deductible. The proceeds of sale are not entirely assessable. But the profit on sale is. London Australia Investment Co. Ltd v. F.C. of T. (1977) 138 CLR 106 was the first case to establish that proposition."
25. It was there so held, counsel said, "because the act of selling investments was an act done in carrying out the investment business".
26. The applicant also relied upon Memorex Pty Ltd v. Federal Commissioner of Taxation (1987) 77 ALR 299 and Federal Commissioner of Taxation v. GKN Kwikform Services Pty Ltd (1991) 21 ATR 1532. It went on to submit that if the vehicles here in question had been "sold at a profit above that brought into account by section 59(2) there would be no doubt that the excess would be assessable under s.25. The corollary must also be true i.e. that the excess loss is deductible under s.51(1). And it would not be denied by the Commissioner but for section 57AF".
27. A later passage in the written submissions read:
"In the case of an asset to which s.57AF applies a deduction is not available under the depreciation provisions for the whole loss. But for a taxpayer having an appropriate business, such as a money-lender the excess of the loss not otherwise allowable is allowable as a deduction under s.51(1). That that is so is a product of the particular business and the relationship of the assets to that business."28. In the course of final oral submissions for the applicant, its counsel agreed that, had the leasing transactions under consideration here been carried out as the sole business of a company other than a bank or a money-lender, the same taxation result would have followed if his general submissions were accepted.
29. In its written submissions the respondent pointed out that the leases plainly contemplated in fact "the receipt by the applicant over the period of the lease of the rental payments provided for in the lease and then at the end of the lease disposal of the motor cars at their residual value. Such a transaction, if completed, clearly will not provide a loss for the Bank, because the total amount received by the Bank will be equivalent to repayment in full of the moneys outlined by the Bank to purchase the motor cars plus interest at a predetermined rate".
30. It went on to submit that "the question is not: what is the Bank's true profit" but "are the claimed deductions allowable under section 51". It cited the statement by Gibbs J in Nilsen Development Laboratories Pty Ltd v. F.C. of T. (1981) 144 CLR 616 at 628-30, and went on to point out that the applicant had not disputed that its rental receipts were fully income for tax purposes, whatever the position was with regard to its "true" economic profit.
31. The respondent submitted that if the parties dealt on the basis which the applicant had set out, they must accept the consequences, and that no loss is allowable under section 51(1) "because depreciation has been allowed in respect of the whole of the item even though there may not have been a deduction in respect of the whole of the amount". It disavowed any submission that sections 54 to 62 operate as an exclusive code but contended that "the depreciation provisions have operated over the whole of the property".
32. Counsel for the respondent further submitted that the suggested "corollary" argument set out in paragraphs 9 and 10 of the applicant's written submission (set out above) is unfounded. There are, as he pointed out, two separate questions:
1. if the respondent alleged that the applicant made a profit, did it in fact do so, and would that profit be taxable?
2. if the applicant claims to have made a loss, did it in fact do so, and if so, was it entitled to claim the benefit of it under section 51(1).33. The answer to the first question does not determine the answer to the second, as the Act makes separate provisions dealing with them.
34. The respondent submitted that the basis of the applicant's claim seemed to involve at least two elements:
1. "that by limiting the cost price available for depreciation on motor vehicles, section 57AF takes the non-depreciable portion of the purchase price out of the operation of the other provisions dealing with depreciation".
2. that, "independently of the depreciation provisions, a taxpayer (being a finance company) is entitled to a deduction for any loss on the disposal of its income- producing structure acquired for income producing by way of lease".35. The respondent submitted that, in any event, there was no loss suffered by the applicant, observing that:
"It has already been pointed out that the Bank's submissions acknowledge that the transactions contemplated by the Bank in entering into the leases, i.e. receipt of rent over the period of the leases and the disposal of the cars to the lessees at their residual value, produce together profits for the Bank, not losses (see Applicant;'s submissions para. 9). But the Bank wishes to say that the purchase and sale of the cars should be accounted for and taxed as discrete transactions separate from their leasing. If the cars were part of the Bank's trading stock, this would, no doubt, be correct - by reason of the trading stock provision of the Act; but they are not part of the Bank's trading stock. If the purchase/leasing/sale were in fact all separate transactions, it would also be correct. But here, as the Bank's submissions point out, what is involved is a 'financing device'. The description of that device, in paragraph 2 of the Bank's submissions, by reference to the remarks of Priestly JA in Austin's case, necessarily involves the conclusion that disposal of the cars at residual value-something all along contemplated by the Bank as an integral part of the 'device'-does not result in a loss to the Bank. This is for the simple reason that the whole device earns profits for the Bank, and it is accordingly incorrect to regard the final step in the device (the disposal of the cars) as involving a loss to the Bank merely because the sale takes place at less than cost price."36. In his final oral submissions counsel for the respondent referred to the applicant's Exhibit RNB 6A which became Exhibit 3 and was incorporated in the applicants final written submissions, at p 21D. It read:
"TERMINATION OF A LUXURY MOTOR VEHICLE ASSET NO. 040-N2366 Upon termination of the lease, the primary and secondary assets recorded in COFAS are retired.
(A) SECTION 59 ADJUSTMENT
Page 110 of Exhibit 'RNB3' (a copy of which is attached) records the retirement of the primary asset (asset number 040-N2366) and demonstrates the calculation of the section 59(1) income amount as follows:
Consideration Receivable calculated in accordance with the formula AB in section 59(6) where
C
$ A. Consideration receivable in
accordance with sub-section
59(3) ie sale price less
expense of sale: see Exhibit
'RNB5A' (sale price = $11,980,
expense of sale = nil) (not
affected by s57AF(13), s59(4)
or s59AA0 11,980.00 B. Motor Vehicle depreciation
limit per s57AF(6) 19,732.00 C. Cost for purposes of calculation
of depreciation of s57AF had not
applied, (s57AF(13) - not
applicable in these matters.) 29,000.00 Consideration = A ($11,980) x B ($19,732)= C ($29,000) 8,151.00 Calculation of Income Amount
s62(1) Depreciated Value = s57AF 'Cost' (being primary asset cost of $19,732
less depreciation claimed and allowed
$14,836) 4,896.00 Less: s59(6) Consideration Receivable 8,151.00 s59(2) Assessable Income 3,255.00
(B) SECTION 51(1) LOSS
Page 345 of Exhibit 'RNB4' (a copy of which is attached) records the retirement of the secondary asset (asset number 040-N2366-001) and the deduction claimed under sub-section 51(1) as follows:
Secondary Asset Capital Cost (no
depreciation claimed on this
amount) (being $29,000.00 less
s57AF cost limit of $19,732) 9.286.00 Less: Sale Proceeds as apportion- ed above ($11,980 less sub-section 59(6) amount of $8,151.00) 3,829.00 Loss claimed under sub-section
51(1) of the Act (5,439.00)"37. Counsel for the respondent pointed out that the amount of $3255 was shown as assessable income, pursuant to the provisions of s.59(2) and a loss was claimed under s.51(1) in the amount of $5439, "so that the same transaction in respect of the same amount of money produced, according to that analysis, a profit and a loss at the same minute in respect of the same sum". He used this example to support his earlier written submission that:
"it cannot be the intention of the Act that a single undivided receipt arising from the disposal of a single asset should require at one and the same time the inclusion of an amount in assessable income because previously allowed deductions have to that extent been recouped by the receipt, and also the allowance of a deduction from assessable income because the receipt represents not only the gain to the taxpayer already referred to but also at the same time a loss to it. Yet this is what the Bank's submissions are openly acknowledged to involve. In the respondent's submission what this shows is that a luxury motor car should be treated as a single asset, its cost price should be treated as a single outgoing and its sale price should be treated as a single receipt, for these are the facts and the Act has not deemed it to be otherwise. When this is done it can easily be seen that the receipt of the sale price of such a vehicle may involve the receipt of income or it may involve the incurrence of a loss, but it cannot at one and the same time involve both. If this be so the reasoning on which the Bank's submissions rest must fail."38. Counsel described the applicant's submissions as being "that the introduction of section 57AF has produced a situation where a section completely inoperable before in relation to these transactions, namely section 51, suddenly comes into effect, although there was absolutely no room for its operation before". Having treated the luxury cars as capital assets for the purposes of depreciation, it was not open to the respondent to claim a loss in respect of their sale.
39. Before the introduction of section 57AF, the liability to tax of a taxpayer who leased a motor vehicle to a customer in circumstances such as those in the present case fell to be determined in accordance with the then existing depreciation provisions of the Act without reference to section 51(1).
40. The applicant submitted that after the introduction of section 57AF it was open to it to rely upon the provisions of section 51(1). It pointed out that section 57AF does not refer in terms to the operation of section 51(1).
41. The applicant acknowledged that the course which it followed in purchasing and leasing luxury motor vehicles has been widespread in commerce for many years. Accordingly, the legislature may be taken to have been aware of it. It conceded that if its suggested construction of the Act were adopted, only those engaged in the leasing field would benefit from it. Taxpayers who purchased their own luxury cars or acquired them by hire purchase would be limited to a claim under the depreciation sections.
42. If, on its true construction, section 57AF produced this differential treatment of taxpayers, then it must be given effect. However the section on its face, that is, without reference to any extrinsic material, reveals a policy designed to reduce the taxation advantages available by way of depreciation of luxury motor vehicles. Those advantages when section 57AF came into operation flowed from the depreciation sections of the Act, there being no occasion to seek to invoke section 51(1).
43. It would be strange indeed if the true construction of section 57AF were to be that the policy expressed in it were to be limited by the fact that s.51(1) should, so far as the taxpayer and others in the leasing business, spring into action in aid of such taxpayers and so produce the result that there was one taxation result for them and a less favourable one for all taxpayers outside the leasing field.
44. It is true that section 57AF is silent in respect of section 51(1) but, in my opinion, that silence is better appreciated as silence in respect of a section (51(1)) which was regarded as having nothing to say in the circumstances.
45. In my opinion, the result for which the applicant contends would appear to run contrary to the general tenor of section 57AF and, for good measure, to benefit capriciously those in the leasing field, while still permitting the lessee to claim deductions in respect of his payments under the lease.
46. The submissions of the respondent on the construction of the Act and its application to the transactions here in question are well founded. In my opinion it was not open to the taxpayer to call in aid s.51(1) as it sought to do.
47. Section 15AB of the Acts Interpretation Act 1901 provides as follows:
"15AB. (1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.
(2) Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:
...
(e) any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by as Minister before the time when the provision was enacted;
(f) the speech made to a House of the Parliament by a Minister on the occasion of the moving by that Minister of a motion that the Bill containing the provision be read a second time in that House;
...
(3) In determining whether consideration should be given to any material in accordance with subsection (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to:
(a) the desirability of persons being able to rely on the ordinary meaning conveyed by the test of the provision taking into account its context in the Act and the purpose or object underlying the Act; and
(b) the need to avoid prolonging legal or other proceedings without compensating advantage."48. I have not found it necessary to refer to extrinsic material in arriving at my opinion, but if it were necessary to do so, that opinion would be supported by reference to the terms of the explanatory memorandum set out in Schedule A and the Minister's speech set out in Schedule B to these reasons. Those documents show that it was contemplated that the provision would operate in respect of leased vehicles. They cannot assist in the construction of s.51(1) but they can do so in determining whether s.57AF had the effect of causing s.51(1) to spring into operation.
49. The respondent contended that, in any event, the applicant made no loss on the leasing transactions. What it did was to fix the residual value at a figure which would not attract the hostile interest of the Commissioner and upon that basis to determine the rental payments by the use of a rate of interest apt to produce the planned profit on the transaction as a whole, when the rental had been received and the luxury motor car was sold to the lessee or another purchaser. In my opinion, that contention was sound and it is fatal to the applicant's submission that it suffered a "loss" determined by subtracting the residual payment from the purchase price.
50. Had it been necessary to do so, I would have accepted the respondent's submission in the further alternative that any loss suffered by the applicant would have been a loss of capital.
51. The Commissioner should bring in short minutes of orders to give effect to these reasons. The minutes should be delivered to my Associate and to the solicitors for the applicant within 7 days of the delivery of these reasons. The matter will be listed on a date and time to be notified to enable the parties to speak to the minutes.
SCHEDULE A
"The purpose of sub-clause (1) of clause 9 is to insert a new section section 57AF - in the Principal Act which will limit to $18,000 for the year of income ending 30 June 1980 the cost for depreciation purposes (to be known as the motor vehicle depreciation limit) of a motor car or station wagon, including such a vehicle which is a four wheel drive vehicle, acquired by a taxpayer after 21 August 1979 and first used by the taxpayer during that year of income.
...
Sub-section (2) is the main operative provision in the new section. Where a taxpayer who owns a motor vehicle to which section 57AF applies would otherwise be entitled to depreciation allowances based on a cost in excess of the motor vehicle depreciation limit applicable to the year of income during which he first used it, whether for the purpose of producing assessable income or otherwise, the sub-section provides for that limit to be treated as being the cost of the vehicle for the purpose of calculating the depreciation allowable to the taxpayer for any year of income. The sub-section deems the cost of the vehicle to be the amount of the motor vehicle depreciation limit that applies in relation to the income year in which the vehicle is first used. The motor vehicle depreciation limit will apply for the purpose of section 56(1)(b) of the Principal Act in calculating depreciation under the prime cost method. It will apply also for the purposes of section 62(1) of the Principal Act in calculating the 'depreciated value' of property. The 'depreciated value' of property is used in the calculation of depreciation under the diminishing value method of depreciation and for the purpose of calculating any balancing adjustments on disposal, loss or destruction of the property in accordance with section 59. The limit will apply in relation to all cars and station wagons which are not 'excluded units of property' and in respect of which depreciation is allowable. It will thus apply to vehicles owned and let out on lease by finance companies or other lessors. Where finance companies use a financial or actuarial method of calculating the amount of taxable income - in which case an allowance for depreciation is reflected in the calculations - an appropriate adjustment will be made in calculating the taxable income of the finance company to reflect the depreciation cost limit that applies to the vehicles concerned." SCHEDULE B
"Limitation of Value of Motor Cars for Depreciation and Leasing Purposes
Whilst the Government recognises that cars needed in many businesses and professions it does not believe there is any reason why the revenue should subsidise the full cost of expensive luxury vehicles used for such purposes.
The Government has decided to limit to $18,000 the amount which may be depreciated for income tax purposes for motor cars and station wagons (including four-wheel-drive vehicles, leased vehicles, and those used to provide services to the general public) ordered after tonight.
The excess of the price above $18,000 will not be depreciable and balancing adjustments on disposal will be calculated by reference to a deemed cost of $18,000.
The limit of $18,000 for depreciation purposes will be indexed annually.
The gain to revenue from this proposal will be negligible in 1979-80 and $15 million in a full year.
I mention also that the Government is concerned that some lessees of cars and station wagons are, at the end of the lease, buying the vehicles for a price that enables them to profit by reselling the vehicles at their market value.
As the law now stands, the resulting profit may not be taxable, even though it effectively represents a recoupment of tax deductible lease charges.
Accordingly, the Government has decided to amend the law to ensure that any such profit is taxed on a basis corresponding with that applied where a person sells plant on which he has previously been allowed depreciation.
The amendment will apply in respect of all cars and station wagons that are purchased from lessors by the lessee or a relative or other associate after tonight.
The gain to revenue from this proposal will be negligible in 1979-80 but about $25 million in a full year."
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Commissioner of Taxation v Mercantile Mutual Insurance (Workers' Compensation) Ltd [1999] FCA 351
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