Commissioner of Taxation of the Commonwealth of Australia v Nilsen Porcelains (Australia) Pty Ltd & Ors Nilsens Broadcasting Service Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia

FEDERAL COMMISSIONER OF TAXATION v. NILSEN PORCELAINS (AUSTRALIA) PTY. LTD.
(1979) 41 FLR 36
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Brennan(1), Deane(2), Fisher(3) JJ.

CATCHWORDS

Income Tax - Assessable income - Allowable deductions - Long service leave - Annual leave - Anticipated future payments - Employee entitled to long service leave not yet taken - Employee entitled to annual leave not yet taken - Income Tax Assessment Act 1936 (Cth.), s. 51 (1).

HEADNOTE

For the year ended 30th June, 1974, the taxpayers claimed as an allowable deduction under s. 51 (1) of the Income Tax Assessment Act 1936 (Cth.) the total outstanding amount of their liability for long service leave to employees who had become entitled to long service leave under the terms of their applicable award but who had not taken that leave. The taxpayers also claimed their liability for annual leave to employees who had not taken the leave for which the claims were made during the year ended 30th June, 1974.

The Commissioner disallowed the claims. On appeal to the Supreme Court of Victoria, Murphy J. allowed the taxpayers' appeals in part.

Murphy J. held, as to the claim for long service leave, that so much of the taxpayers' liability for long service leave existing at 30th June, 1974, as had accured during the income year to employees who were entitled to that leave was deductible, but that such liability as had accrued in previous income years was not deductible. As to the claim for annual leave his Honour held that the sums representing the amounts which accrued by way of annual leave to employees who had been continuously employed for over twelve months at 30th June, 1974, were deductible, except to the extent that a particular sum included a sum which had already accrued at 30th June, 1973. Claims in respect of employees who had not served continuously for twelve months were not deductible.

The Commissioner appealed to the Full Court of the Federal Court of Australia against each of his Honour's orders, submitting that none of the deductions in issue should have been allowed. Each of the taxpayers cross appealed submitting that the deductions claimed should have been allowed in full.

Held: Per Brennan and Deane JJ., Fisher J. dissenting - (1) The claims for the taxpayers' liability for long service leave were not allowable deductions under s. 51 (1).

(2) The claims for the taxpayers' liability for annual leave were not allowable deductions under s. 51 (1).

Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953), 88 CLR 492, applied.

Appeals by Commissioner allowed. Cross appeals by taxpayers disallowed.

HEARING

Sydney, 1978, November 3, 8; 1979, October 8. #DATE 8:10:1979

APPEAL.

Appeal to the Full Court of the Federal Court from the Supreme Court of Victoria (Murphy J.).

The material facts appear in the judgments.

P. A. Liddell Q.C. and A. J. Myers, for the appellant Commissioner.

A. P. Webb Q.C. and I. C. F. Spry, for the respondent taxpayers.

Cur. adv. vult.

Solicitor for the Commissioner: Alan R. Neaves (Commonwealth Crown Solicitor).

Solicitors for the taxpayers: Best, Hooper Rintoul & Shallard.

R. MCK. ROBSON

JUDGE1

October 8.

The following written judgments were delivered.

BRENNAN J. Notices of assessments to income tax were issued to each of Nilsen Porcelains (Australia) Pty. Ltd., Nilsen's Broadcasting Service Pty. Ltd. and Nilsen Development Laboratories Pty. Ltd. for the income year ended 30th June, 1974, disallowing certain deductions which the taxpayers had claimed by reason of their respective employees' entitlements or prospective entitlements to long service leave and to annual holidays. The taxpayers objected and appealed to the Supreme Court of Victoria against the disallowance of their objections. Murphy J., allowing the taxpayers' appeals in part, made orders reducing each of the assessments by an amount which was, however, less than the deductions claimed. (at p37)

Three categories of deductions were in issue, the question in each case being whether the deduction was allowable under s. 51 (1) of the Income Tax Assessment Act 1936 (Cth.). His Honour held, as to the first category, that so much of the taxpayers' liability for long service leave existing at 30th June, 1974, "as had accrued due" during the income year to employees who were entitled to that leave was deductible, but that such liability as had accrued due in previous income years was not deductible. As to the second category, his Honour held that "the sums representing the amounts which accrued due by way of annual leave to employees who had been continuously employed for over twelve months at 30th June, 1974" were deductible, except to the extent that a particular sum "includes a sum which had already accrued due at 30th June, 1973". As to the third category, his Honour held that a sum claimed "in respect to employees of the taxpayer who had not, at 30th June, 1974, served continuously for twelve months" was not deductible. As his Honour held that each of the taxpayers should be allowed part of the deductions claimed by it, he ordered that the assessments in each case be reduced. (at p37)
The appellant appeals against each of his Honour's orders, submitting that none of the deductions in issue should have been allowed. Each of the taxpayers cross appeals against the order made in its case, submitting that the deduction claimed by it should have been allowed in full. The appeal and cross appeal in the case of Nilsen Development Laboratories Pty. Ltd. (which I shall call the respondent) were treated in argument as raising the issues requiring the judgment of this Court in the cases of each of the taxpayers. (at p38)
The Metal Trades (Long Service Leave) Award 1964, and the Metal Industries Award covered the relevant employees of the respondent: those who were entitled to long service leave at the material times; those who were entitled to annual holidays and who had been employed for more than twelve months at 30th June, 1974; and those who had not then been employed for more than twelve months but whose holiday pay entitlement at 30th June, 1974, was the sum calculated and claimed as a deduction. (at p38)
None of the amounts claimed as deductions was paid out during the income year, but the respondent submits that they were nevertheless "outgoings incurred" for the purposes of s. 51 (1). The phrase comprehends more than expenditure made and includes "a liability presently incurred and due though not yet discharged" (Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation per Latham C.J. (1944) 71 CLR 596, at p 606 ). Dixon J. in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation said that: "'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" (1938) 61 CLR 179, at p 207 . Whether a particular deduction is an "outgoing incurred" depends upon the nature of the liability which gives rise to the deduction and the respondent's obligation to discharge that liability as at 30th June, 1974. (at p38)
It is convenient first to consider the liability in respect of long service leave arising under the Metal Trades (Long Service Leave) Award 1964. Clause 6 of the award defines the amount of leave to which an employee is entitled after service with an employer. After fifteen years' service an employee is entitled to thirteen weeks' long service leave and he accumulates a proportionate additional entitlement after fifteen years' service (cl. 6 (1)). If the employee's service terminates after ten years but before fifteen years, he is entitled to a proportionate amount of long service leave where the employment is terminated: (i) by the employer for any cause other than serious and wilful misconduct; or (ii) by the employee on account of illness, incapacity or domestic or any other pressing necessity where such illness, incapacity or necessity is of such a nature as to justify such termination; or (iii) by the death of the employee (cl. 6 (2) (b)). Clause 6 (3) prohibits payment in lieu of leave, except as permitted by the award. The award does permit payment to an employee who is entitled to long service leave on the termination of his employment or to the personal representative of such an employee where the employee dies (cl. 8 (2)). But an employee who remains in employment is not entitled to any payment prior to the time when he commences the period of leave (cl. 7), and cl. 8 defines the times when leave is to be granted and taken. Whenever an employee goes on long service leave, he is entitled to "the rate of wage then currently prescribed" (cl. 7 (1)), and if the rate is changed during the period of leave and the employee has been paid in advance in respect of his long service leave, the advance payment must be adjusted, upon the employee's return to duty, to accord with the changed rate to the extent to which it is applicable (cl. 7 (2)). (at p39)
At the end of the income year, two of the relevant employees of the respondent were entitled to be granted long service leave or to agree with the employer when the leave to which they were respectively entitled should be taken (cl. 8 (1)). The entitlement of those employees to long service leave was indefeasible, for each had credit for more than fifteen years' continuous service. In fact some of that service was with another company, but service with that other company was deemed to be service with the respondent, pursuant to cl. 5 (5) of the award. Clause 5 (5) provides for deemed continuity of service where an employer transmits to another employer the business in which an employee is employed. (at p39)
The employees entitled to long service leave had not been granted and had not taken long service leave during the income year, and, at the end of the year, leave was not then granted to any employee, nor was any employee then required to take it. At the end of the year, the entitlement of the relevant employees was not a present entitlement to money. Reciprocally, the respondent's obligation was not then a liability to pay money. (at p39)
A pecuniary liability could not arise before the time when an employee went on leave (cl. 7), or his employement was terminated (cl. 8 (2) (a)) or he died (cl. 8 (2) (b)). Though it was clear that pecuniary liability would be imposed by the award so soon as one of these events occurred, no pecuniary liability was imposed during the income year. Though it was certain that a liability to pay money to these employees or their respective personal representatives would at some future time be imposed by the award, the time when that would occur and the quantum of the payment which would then have to be made depended upon further events. In these circumstances, it was proper for the respondent to make provision in its 1974 accounts for a liability which was both foreseeable and inevitable. It did so by raising a provision for the payment of long service leave, calculated by reference to the respective employees' entitlements to leave (based on their respective years of service), and to the rate of wage then currently prescribed. The sum provided was the amount which, if leave had been taken on 30th June, 1974, would then have become payable. (at p40)
A similar calculation had been made in order to make provision for long service in the respondent's 1973 accounts, but the factors in the 1973 calculation would have been a shorter period of service and, it may be assumed, a lower weekly rate of wages than in 1974. Amounts paid in respect of long service leave actually taken in a year were taken into account in fixing the provision at the end of the year. His Honour upheld the respondent's claim for a deduction of the amount of the 1974 provision only to the extent to which that provision had increased during the income year - that is, the excess of the 1974 provision over the 1973 provision. (at p40)
The second and third kinds of deductions claimed relate to annual leave, which is provided for by cl. 25 of the Metal Industry Award 1971. An employee on weekly hiring must be allowed twenty-one consecutive days' leave annually after twelve months' continuous service (less the period of annual leave) (subcl. (a)). Sub-clause (1) provides: "An employee on weekly hiring who: (i) After one week's continuous service in his first qualifying twelve monthly period with an employer, lawfully leaves the employment of the employer or his employment is terminated by the employer through no fault of the employee, or (ii) after twelve months' continous service with an employer, leaves the employment of the employer or his employment is terminated by the employer for any reason", is entitled to be paid a sum calculated proportionately upon the period of the employee's continuous service and the rate of wage then prescribed. (at p40)
Apart from payment to an employee whose employment is terminated (under sub-cl. (1)), or payment to adjust leave entitlements during an annual closedown of a plant (sub-cl. (m)), payment in lieu of annual leave is prohibited (sub-cl. (g)). An employee is therefore not entitled to any payment in respect of his annual leave until the time before he actually goes on leave (subcl. (j)). Unless the employee agrees that leave be taken before the due date (sub-cl. (i)), the time for taking leave is prescribed by sub-cl. (h): "Annual leave shall be given at a time fixed by the employer within a period not exceeding six months from the date when the right to annual leave accrued and after not less than four weeks notice to the employee." Before an employee goes on leave, sub-cl. (j) requires that he "be paid the wages he would have received in respect of the ordinary time he would have worked had he not been on leave during the relevant period". Provision is made for determining the rate appropriate to particular classes of employees. (at p40)
The respondent's employees who had given more than twelve months' continuous service were indefeasibly entitled to annual leave at the conclusion of each twelve-monthly period or to payment in lieu of leave on termination of their employment. The respondent's employees who had given more than one week but less than twelve months' continuous service would not become entitled to annual leave until twelve months' continuous service had been given unless the respondent, pursuant to sub-cl. (i) allowed the employee "to take annual leave either wholly or partly in advance before the right thereto (had) accrued due". Nor would such an employee be entitled to a payment on termination of his employment except as provided for by sub-cl. (1) (i). (at p41)
At the end of the income year, none of these employees had an entitlement to be paid money. The respondent's pecuniary liability to any employee would not arise until the time specified in sub-cl. (j), that is, "before going on leave", or the time specified in sub-cl. (1), that is, when the employee "leaves the employment of the employer or his employment is terminated", whichever first occurred. (at p41)
The respondent made provision in its 1974 accounts in respect of the payments which it would, in the ordinary course of business, expect to make for annual leave. It calculated what it would have to pay on the periods of service given to 30th June, 1974, and the rates of pay then current. Except in the cases of the employees of less than twelve months' standing, his Honour applied the same principle in partially allowing the respondent's claim for a deduction for annual leave as he applied in partially allowing its claim for a deduction for long service leave. (at p41)
In respect of neither kind of deduction can it be said that the respondent was under a present pecuniary liability at 30th June, 1974. None of the amounts provided by the respondent in its 1974 accounts represented a debitum in praesenti, solvendum in futuro: there was no present pecuniary liability. This is not a case of an award which entitles the employer to defer payment of moneys due to a workman. That is not to deny, of course, the certainty that pecuniary liabilities would arise, but they did not arise during the income year. (at p41)
The present case is not one where a pecuniary liability is defeasible, or where a pecuniary liability is difficult to quantify, or where the cost of discharging a liability may fluctuate from time to time. We had the benefit of argument upon a number of authorities relating to cases of these kinds, but the present case is of a different kind, for no relevant pecuniary liability arose during the income year. I should add that, so far as this conclusion relates to long service leave, it does not depend upon cl. 5 (5) of the award. Although an employer who has transmitted his business to another may, on one view of that sub-clause, avoid liability to make payments in respect of long service leave, and shift the liability to the transmittee of the business, the sub-clause does not enable the transmittor unilaterally to shed his award obligation to his employee. Unless the employee and the transmittee choose to enter into a relationship of employer and employee, the transmittor is liable (on any view of the sub-clause) on terminating his employee's service to grant the employee the long service leave to which he is entitled and to pay him accordingly. Whatever be the true construction of the sub-clause, however, there is no pecuniary liability imposed upon the transmittor prior to the termination of his relationship with his employee. (at p42)
As an employee's pecuniary entitlements under both awards, when they fell due, were quantified by reference to the period of his service, it is tempting to attribute the ultimate cost of defraying the liability rateably to the period of service. Indeed, an accountant seeking to ascertain the profit or loss of the income year would prepare his accounts on that footing. But, as the High Court pointed out in Federal Commissioner of Taxation v. James Flood Pty. Ltd.: "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 s. 51 (1) but it cannot be substituted for the test" (1953) 88 CLR 492, at pp 506-507 . Flood's case was concerned with an employer's claim for a deduction on account of its award obligation to give paid annual leave. Though the award provisions as to annual leave there under consideration were framed in terms similar to the terms of the Metal Industries Award, there are differences between the facts of the present case and the facts which the court assumed to have been accepted in Flood's case. In Flood's case it was not shown that any employee whose employment was terminated on or after 30th June, 1947, (the end of the relevant income year) would be indefeasibly entitled to payment in lieu of annual leave, and, in the case of continuing employees, the deduction claimed represented part of the actual holiday pay that would evidently not become due until December 1947. And so one finds the court rejecting the employer's claim for a deduction, characterizing the employer's liability at the end of the income year as inchoate, in process of accrual, and subject to contingencies (1953) 88 CLR, at p 508 . (at p42)
The differences between Flood's case and the present case led his Honour to distinguish it, and thus to open the path to allowing in part the deduction claimed. The court said in Flood's case: "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 ensuing 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 futuro. 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. It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30th June 1947, became predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means that it is imposed in the form of a liability associated with the operations of the taxpayer for the ensuing year" (1953) 88 CLR, at pp 507-508 . (at p43)

Inherent in this passage are the notions that one must identify the pecuniary liability in respect of which a deduction is claimed and attribute it to an accounting period. The pecuniary liabilities here in issue, arising solely under awards, do not come into existence until the fulfilment of the conditions and the occurrence of the events specified in the awards. A particular liability to each employee arises, provided the employee has served for the requisite period, upon the occurrence of an event: on his going on leave, on his termination of employment, or (in the case of long service leave) on his death. Although the period of service antecedent to the relevant event both fulfils a condition upon which the pecuniary liability depends, and provides one of the factors for measuring the amount of that liability, the particular liability which falls to be discharged does not exist during that period of service. When the particular liability comes into existence, it can be attributed only to the accounting period then current or, where leave is taken in more than one accounting period, to those periods. To attribute a leave payment to other periods during which an employee was actually working may well be appropriate if one is attempting to assess the profits of an undertaking during those other periods, and s. 51 (1) allows a deduction in a given accounting period for an outgoing incurred in that period although the outgoing was incurred in gaining the assessable income of another period (A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation (1975) 132 CLR 175, at pp 185, 197 ). Accordingly, the period within which an outgoing is incurred is not necessarily the period within which related assessable income is gained, and an outgoing incurred in one period is not to be attributed to another period, merely because a provision for it is properly included in the profit and loss account of the latter period. The particular pecuniary liabilities to the several employees of the respondent which would ultimately fall due were not incurred during the income year, and, in my opinion, there is no ground upon which Flood's case (1953) 88 CLR 492 may be distinguished from the present. (at p43)
I would therefore allow the appellant's appeal, and dismiss the cross appeals. The orders of the Supreme Court should be set aside, and in lieu thereof the taxpayers' appeals to the Supreme Court should be dismissed with costs to be taxed. The appellant should have the costs of this appeal and of the cross appeals. (at p44)

JUDGE2

DEANE J. These are appeals by the Commissioner of Taxation ("the Commissioner") from decisions of the Supreme Court of Victoria (Murphy J.) upholding, in part, appeals by the three respondent taxpayers against their respective income tax assessments for the year of income ended 30th June, 1974 ("the tax year"). Each respondent taxpayer cross appeals against the decision of the Supreme Court in so far as its objection to its assessment was not sustained by that court. In issue between the Commissioner and each taxpayer is the taxpayer's entitlement to the benefit of deductions in respect of so much of its anticipated future payments to employees in respect of annual leave and long service leave as would be related to service prior to the end of the tax year. In some cases, the relevant employee had served a full qualifying period for leave prior to the end of the tax year with the result that an entitlement to take leave had accrued. In other cases, a full qualifying period for leave had not been completed. (at p44)

It is common ground between the parties that any entitlement of the taxpayers to the disputed deductions falls to be determined by reference to the provisions of s. 51 (1) of the Income Tax Assessment Act 1936 (Cth.) ("the Act"). The taxpayers will only be entitled to the claimed deductions if and to the extent that they constitute losses or outgoings of the tax year incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Plainly, the taxpayers are, at some stage, entitled to a deduction in respect of payments to employees in respect of periods during which employees are absent from work on annual leave or long service leave. The primary question involved in the appeals is whether, in the ordinary case where such leave is actually taken and payment made at the time it is taken, the employer is entitled to the benefit of the deduction only at the time when the leave is taken and the payment is made. If the employer may, in such a case, be entitled to a deduction at some point prior to the time at which the leave is taken and the payment is made, a question will arise as to the appropriate criterion for determining the time at which the entitlement to a deduction may arise and the extent of the deduction. (at p44)
If the matter fell to be determined by reference only to commercial and accountancy practice, it would be apparent that the Commissioner's appeals should be dismissed. It would be out of accord with accountancy practice and commercial reality to disregard, in the ascertainment of the profits of a business for a period, that part of the accruing and the accrued obligation to grant periods of leave to continuing employees and to make payments in lieu of leave to employees whose employment ceases, which can properly be related to service during the period in question. Both accountancy practice and commercial reality support the approach that an employer should treat a proportion of the amount which he will, apart from the contingency of a change of ownership of his business, be ultimately required to pay employees in respect of annual leave and long service leave as an additional cost of the period of service of the employees by reference to which the entitlement to leave is derived. The concept of annual leave and long service underlying this accountancy and commercial approach is, to adapt words used in Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR, at p 504 ; that such leave is a period of leisure to which the employee becomes progressively entitled de die in diem as he works and for which correspondingly the employer becomes progressively liable to pay as part of the cost of labour employed from day to day, actual payment only being deferred to the commencement of the period of leave or the sooner determination of the employment. When it becomes antecedently clear that, apart from the contingency of a change of ownership of the undertaking, an employer will be required to make future payments in respect of annual leave or long service leave without receiving any corresponding quid pro quo by way of services, prudent accountancy practice requires that provision be made in the employer's accounts to cover the future obligation to make the payments. To the extent to which the employees' entitlement to such leave will be based upon services rendered during a particular accounting period, prudent accountancy practice requires that the relevant provisions be made before the ascertainment of the profit or loss of the period. (at p45)
While commercial and accountancy practice may be relevant in ascertaining the nature and incidence of a claimed deduction as a step towards determining whether it answers the test laid down by s. 51 (1) of the Act, it cannot be substituted for that test. The ascertainment of whether a claimed deduction satisfies the test laid down by s.51 (1) is ultimately a matter of jurisprudence (see Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR, at pp 506-507 ). There is probably no general area in which discrepancy between accountancy practice and the test postulated by s. 51 (1) is more likely than the area in which accountancy practice requires the raising of a provision before the ascertainment of the profits of a period. Of its nature, the making of a provision seems more appropriate to a loss or outgoing which is impending, threatened or intended than to a loss or outgoing which has actually been run into, encountered or fallen upon and which will ordinarily be taken into account as a result of a payment being made, a liability being brought to account as distinct from provided for, or an amount being actually written off. (at p46)
The rights of an employee and the obligations of an employer in respect of annual and long service leave must be defined in the context of the relevant provisions of the applicable award of statute. There are, however, a number of common features of both annual leave and long service leave under such provisions which are found in the two awards (the Metal Industry Award 1971 and the Metal Trades (Long Service Leave) Award 1964) relevant in the present appeals. The primary entitlement of a continuing employee in respect of long service leave and annual leave is an entitlement, during a period of employment in respect of which he will be entitled to the payment of salary or wages (sometimes with a loading), to be excused from working or attending for work. The primary obligation of the employer is to excuse the employee from work and from attendance at work while paying the employee's salary or wages, together with any loading, in respect of the period of leave. Unless the employment comes to an end, neither the entitlement can be satisfied nor the liability discharged by the acceptance or the making of a payment in lieu of leave. The leave itself must be taken. Herein lies the basis of the argument advanced on behalf of the Commissioner that an employer is not entitled, in the ordinary case, to claim a deduction pursuant to s. 51 (1) of the Act in respect of the liability to make payments on account of annual leave and long service leave otherwise than when the period of leave is taken and the relevant payments are made. On that argument, the fact that an employee will be excused from working or attending for work during the relevant period of leave does not alter the nature of the payment or the period to which it is primarily referable. The payment is a payment of salary or wages which, in the ordinary case, is referable to the time when the leave is taken and the payment made. It may, as has been mentioned, be antecedently quite certain, apart from the contingency of a change of ownership of the undertaking, that an employer will be required to make future payments for periods of leave calculated by reference to periods of service falling within the year of income. That consideration, according to the argument, shows no more than that part of the regular expenditure incurred in carrying on the relevant undertaking is the payment of wages to men taking annual leave or long service leave and that it is possible to calculate in advance with approximate accuracy the amount of such expenditure which should be related to a period of service falling within the year of income. As a matter of legal analysis, so the argument proceeds, the relevant loss or outgoing is incurred when the occasion for the making of the payment arises, that is when the relevant period of leave commences or the employment of the relevant employee comes to an end. (at p46)
In Flood's case (1953) 88 CLR 492 the taxpayer claimed to be entitled to a deduction under s. 51 (1) of the Act in respect of the amount of a provision for holiday pay which it would, in the future, be obliged to pay to employees by reference to service during the tax year. None of the relevant employees had, at the end of the tax period, completed a period of service necessary to entitle him to take leave at that time. The High Court held that the taxpayer was not entitled to the relevant deduction. The five justices who comprised the court (Dixon C.J., Webb, Fullagar, Kitto and Taylor JJ.) were at pains, in their joint judgment, to stress that the nature and incidence of the relevant liability depended upon the provisions of the particular award. In a critical part of their joint judgment, they referred to the fact that the employees, in that case, had not, by their service, qualified for a period of annual leave. Plainly, there are grounds for distinguishing the actual decision in Flood's case from the present appeals at least in so far as the present appeals may relate to the case of employees who, during the tax year, became actually entitled to take leave as a consequence of completing some qualifying period of service. (at p47)
On the other hand, at the heart of the joint judgment in Flood's case lies a recognition of the competing concepts of the nature of the liability to make payments in respect of annual leave, namely, the commercial view of that liability as a progressive one which should be treated as part of the cost of labour employed from day to day and the jurisprudential view that the liability remains the ordinary liability to pay wages to an employee in respect of a period of employement notwithstanding that the employee's entitlement to leave excuses him from working or attending for work during the period. Logically, the choice between these competing views is not affected by whether or not the qualifying period of service has been completed. In determining entitlement to a deduction under s. 51 (1) of the Act, their Honours accepted the jurisprudential analysis as the relevant one. That choice, and the consequences they saw as flowing from it, appear from the following extracts from the joint judgment: "A most important feature of the award is that 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 payment as something made in respect of the two weeks when leave is actually taken. Prima facie it prohibits the substitution of a money payment for the leave. The prima-facie position is qualified only in the case of an employee who lawfully leaves his employment or whose employment is terminated without his fault. . . . (at p47)
"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" (1953) 88 CLR, at pp 504-505 . (at p48)
"It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30th June 1947, become predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means that it is imposed in the form of a liability associated with the operations of the taxpayer for the ensuing year. In short the deduction claimed of 578 Pounds.10s.2d. does not represent an expenditure associated with the production of income before 30th June 1947 for which a liability had been completely incurred before that date" (1953) 88 CLR, at p 508 . (See also the rationalization of the decision (on a subsidiary point) in W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR 290 which is found in the joint judgment in Flood's case (1953) 88 CLR, at p 507 .) (at p48)
Their Honours' conclusion as to the appropriate analysis of an employer's liability to make payments in respect of periods of annual leave led them to conclude that the relevant time for the deduction was, in the ordinary case, the time when leave was taken and the payment made. When their Honours came, in their judgment, to summarize the effect of their decision, they did not do so in terms which differentiated between the case where a qualifying period for annual leave had been completed and the case where it had not. "This conclusion", they wrote, "only means that pay for annual leave is deductible year by year as it is paid, not that the taxpayer has not the benefit of a deduction" (italics added) (1953) 88 CLR, at p 508 . (at p48)
In Federal Commissioner of Taxation v. Northern Timber and Hardware Co. Pty. Ltd. (1960) 103 CLR 650 the High Court considered the entitlement of the taxpayer to a deduction, pursuant to the provisions of s. 66 of the Act, in respect of a provision made in a year of income to meet prospective liabilities to employees in respect of long service leave. In the course of a joint judgment rejecting the taxpayer's claim, the court (Fullagar, Kitto and Menzies JJ.) referred to the decision in Flood's case as follows: "In Federal Commissioner of Taxation v. James Flood Pty. Ltd. it was recognized that although the amount of a provision for an employer's liability for annual leave to be granted and paid for under an award was not deductible under s. 51, the pay for annual leave would be deductible year by year as it was paid, and there can be no doubt that in a similar way pay for long service leave is deductible in the year in which it is paid. Indeed, it is not easy to see why pay for long service leave would not be deductible when made, notwithstanding that (if it were the fact) the amount of a provision made for such payments had been allowed as a deduction in accordance with the taxpayer's present claim" (1960) 103 CLR, at p 656 . It is possible that in referring, in such general terms, to the effect of Flood's case (1953) 88 CLR 492 their Honours overlooked the fact that pay for annual leave or long service leave may not be paid until a tax year after that in which the entitlement to the relevant period of long service leave or annual leave actually arose upon completion of the necessary qualifying period. It is, however, unlikely that this was so since, at an earlier stage in the judgment, specific reference had been made by their Honours to such a case (1960) 103 CLR, at p 655 . (at p49)
It is now more than twenty-five years since the decision in Flood's case was delivered by the High Court. As has been mentioned the court, in that case, stated in terms that the effect of the decision was that pay for annual leave is deductible year by year as it is paid. It is more than eighteen years since the decision was given in Federal Commissioner of Taxation v. Northern Timber and Hardware Co. Pty. Ltd. (1960) 103 CLR 650 . In that case, the High Court stated, again in terms, that pay for annual leave is deductible year by year as it is paid and that in a similar way pay for long service leave is deductible in the year in which it is paid. Between the decision in Flood's case and the hearing of the present appeals in the Supreme Court, the provision of the Act had been amended on more than fifty occasions without any amendment aimed at qualifying the apparently general effect of what was said in the judgment in that case. (at p49)
Not surprisingly, it has, we were informed by counsel for the parties, become the established practice of the Commissioner to allow deductions in respect of pay for annual leave and for long service leave, in the ordinary case where the leave is taken, only in the year in which the leave is taken and the payments are made. A taxpayer is ordinarily no more entitled to select the period in respect of which entitlement to a deduction arises than he is to select the period in which income is derived. To qualify, at this late stage, the generality of what was said in Flood's case by a narrow assessment of ratio decidendi, would arguably involve the great body of employer taxpayers losing entitlement to the benefit of a deduction in respect of payments actually made to the extent to which it was now held that they had been properly deductible at some prior time. (at p50)

It is, in my view, undesirable that this Court should, in the absence of special circumstances, attempt to cut down the broad effect of a decision of the High Court of Australia by narrow analysis of the ratio decidendi of the particular case. There are not, in my view, any special circumstances which support treating Flood's case (1953) 88 CLR 492 and the Northern Timber and Hardware Co. Pty. Ltd. case (1960) 103 CLR 650 as being other than authority for the general proposition that, in the ordinary case, pay for annual leave and long service leave is deductible year by year as it is paid at the time the leave is taken or on the prior termination of the employment. It is true that, upon analysis, the statements of that broad proposition were obiter. They should however be treated as authoritative and followed by this Court. (at p50)
I should, perhaps, add that even if, contrary to my view, the decision in Flood's case is to be confined to the case where no entitlement to leave in respect of the relevant period of service has accrued due at the end of the tax year, it is not presently apparent to me that it follows that the taxpayers were entitled to all the deductions which the learned judge at first instance allowed them. His Honour drew a distinction between the case where the relevant employee had completed a qualifying period of service and the case where he had not, regardless of whether a relevant qualifying period of service was completed during the tax year. With respect, it is not apparent to me, as presently advised, that that distinction constitutes, on any approach, a proper criterion for determining whether the circumstances are or are not within the actual decision in Flood's case (1953) 88 CLR 492 . When a qualifying period of service is completed, an entitlement to a fixed period of leave accrues. Until the completion of the next qualifying period or the prior termination of employment, no new present entitlement to take leave or to receive a payment will ordinarily accrue. An employee who has not taken a period of annual leave or long service leave which has fallen due is not, by reason of that fact, ordinarily entitled to the immediate enjoyment of the leave which can ultimately be related to, for example, the six months' following the completion of the qualifying period which constitutes the first six months of the next qualifying period. This aspect of the matter does not, however, on the view I take, arise for decision and, since it was not really canvassed in argument before us, I refrain from forming or expressing any firm view upon it. (at p51)
I would uphold the appeals by the Commissioner and dismiss the cross appeals by the taxpayers. I would order that the taxpayers pay the Commissioner's costs both in the Supreme Court and in this Court. (at p51)

JUDGE3

FISHER J. This matter comprises an appeal brought by the Commissioner of Taxation ("the Commissioner") against each of three decisions of the Supreme Court of Victoria. That court upheld the decisions on appeals by Nilsen Porcelains (Australia) Pty. Ltd. ("Porcelains"), an appeal by Nilsen's Broadcasting Service Pty. Ltd. ("Broadcasting") and an appeal by Nilsen Development Laboratories Pty. Ltd. ("the taxpayer") respectively. In each instance that court allowed the objection of the particular objector against an income tax assessment issued against it in respect of the year of income ended 30th June, 1974, ("the year of income"). The consequence of these decisions was that the deduction claimed by each objector was allowed in part. (at p51)

This matter before us also comprises a cross appeal brought by each of them, Porcelains, Broadcasting and the taxpayer, against the same decisions to the extent that the deductions claimed by the particular objector were disallowed in part by the Supreme Court. (at p51)
As Porcelains, Broadcasting and the taxpayer have similar interests in their respective matters, other than as to particular figures, the hearing was conducted before the trial judge in respect only of the circumstances of the taxpayer. Likewise before us the argument was confined to the taxpayer on the basis that our decision would apply mutatis mutandis to both Porcelains and Broadcasting. (at p51)
The taxpayer in the year of income ending 30th June, 1974, claimed as an allowable deduction under s. 51 of the Income Tax Assessment Act 1936 (Cth.) ("the Act") the sum of $8,091. This sum was made up of two provisions, one in respect of the taxpayer's liability to its employees for long service leave and the other in respect likewise of annual leave. As to long service leave the taxpayer provided for the liability on two separate bases. Certain of its employees had served the necessary qualifying period and in respect of these employees the taxpayer accepts that it had an "absolute" liability. It quantified the amount of this absolute liability at $6,359 and claimed to deduct this sum as a loss or outgoing incurred in circumstances which brought it within s. 51 of the Act. The balance of its liability, namely in respect of those employees who had not served the qualifying period, was the subject merely of a provision, and was not brought to account in arriving at the taxable income as returned and thus is not covered by these appeals. The taxpayer sought also to deduct the full amount of what it called its accrued liability for annual leave, namely $1,732, without regard to any question of employees' qualification therefor. (at p52)
The Commissioner in his assessment rejected both claims and by his adjustment sheet reduced the loss which had been returned by the amount of "holiday pay provision $1,732" and "long service leave provision $6,359". The parties acknowledged that in his treatment of these claims for a deduction the Commissioner was acting in accordance with his long-standing practice, namely to allow as deductions the expense of long service leave and annual leave only when the expense was in fact discharged or met. The taxpayer objected to the assessment and upon the Commissioner's disallowance of the objection appealed to the Supreme Court of Victoria. That court (Murphy J.) allowed the appeal but only reduced the amount of the taxable income of the taxpayer by the sum of $2,783. The actual figures are of no significance, having been the subject of agreement between the parties, but the amount thereof is the necessary consequence of the trial judge's decision in principle. (at p52)
In respect of the claim to deduct the absolute liability for long service leave, the trial judge allowed it to the extent of the amount of the increase thereof incurred in the year of income ending 30th June, 1974. The deduction claimed for liability for annual leave was reduced by the amount claimed in respect of those employees who were not entitled to leave at 30th June, 1974. In other words the deduction claimed was allowed in respect only of those employees who had by their service qualified themselves for annual leave at that date. (at p52)
The Commissioner appeals to this Court contending in essence that the Supreme Court should not have allowed any deduction at all under these heads. The taxpayer cross appeals contending for its part that the full amount of the claimed deductions under each head should have been allowed. (at p52)
The trial judge gave his decision in a carefully reasoned judgment which I find quite acceptable and would not disturb either on the appeal or the cross appeal. In the circumstances therefore I will, after briefly reciting the relevant facts which were not in dispute, confine myself to considering the submissions of counsel seeking to uphold the appeal on the one hand and the cross appeal on the other hand. (at p52)
The taxpayer was incorporated in 1968 and immediately thereafter took over from its parent company, Oliver J. Nilsen & Co. Pty. Ltd., so much of that company's business as involved research into and development of electrical engineering processes. At that time most of those persons who were in the year of income employees of the taxpayer were in the employ of Oliver J. Nilsen & Co. Pty. Ltd. These persons terminated their employment with the latter company and were forthwith reemployed by the taxpayer. It is pertinent to note that in the relevant awards such a change of ownership of a business is described as a "transmission" of the business from a "transmittor" to a "transmittee". (at p53)
In respect of the claim to deduct its liability for long service leave the taxpayer's evidence centred upon two employees, Messrs. Aughton and Auty, who had commenced employment with Oliver J. Nilsen & Co. Pty. Ltd., in February 1942 and December 1938 respectively. They each served continuously with that company until the transmission of portion of its business in 1968 to the taxpayer. Each then terminated his employment with the former company and was thereupon employed by the taxpayer. Each of them was in the employment of the taxpayer both on 30th June, 1973, and 30th June, 1974, and had served continuously firstly with the parent company and subsequently with the taxpayer since 1942 and 1938 respectively. Both had taken some long service leave during their employment but all the evidence discloses is that on 30th June, 1974, they were respectively entitled to about nineteen and seventeen weeks long service leave. (at p53)
At 30th June, 1974, the end of the year of income, each had during the year received an increase of pay, neither had taken in that year any long service leave, and thus the taxpayer's liability to each in respect of long service had increased both in consequence of the increase in pay and the further year's service. (at p53)
As to annual leave the taxpayer's claim to an allowable deduction was in respect of employees who fell into two categories; those who had been in its employment for over twelve months since taking annual leave, and those who had served for less than twelve months since taking leave. (at p53)
The trial judge and counsel before us considered separately the taxpayer's claim in respect of liability for long service leave and annual leave and I will do likewise. In each instance however the applicability or otherwise of the decision in Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 was an important element in the arguments of both counsel. (at p53)
As to the claim for long service leave, submissions were made under two heads; was any deduction under s. 51 available to the taxpayer prior to discharging its liability and if so, how much was deductible in the year of income? The trial judge held in answer to the first question that the liability was an accrued obligation not merely an inchoate liability in process of accrual, which obligation had been completely incurred by the taxpayer before the end of the year of income. It followed that in his opinion the obligation which accrued annually from 1968 onwards in respect of each of the employees, Mr. Aughton and Mr. Auty, for amounts by way of payment for long service leave to which each had become entitled was a loss or outgoing incurred, and necessarily incurred, within the meaning of s. 51 (1) of the Act. (at p54)
As to the amount which was deductible under that section in respect of the year of income the trial judge held that the taxpayer was not entitled to deduct so much of its existing liability as had accrued in and was in law claimable as a deduction in preceding years. Its entitlement to a deduction was limited to so much of the liability as accrued during the year of income. He explained that this would include any increment in the entitlement of each employee consequent upon the fact that each had served another year and the fact that in respect of each there had been an increase in the current rate of pay above the rate applicable at the end of the previous year of income. It is in respect of this reduction in the amount claimed by the taxpayer in its return that the taxpayer cross appeals. (at p54)
I will deal in the first instance with the Commissioner's contention that no amount should in the circumstances have been allowed in respect of long service leave by way of deduction under s. 51 (1). His starting point was that the true nature and incidence of the liability of the taxpayer in respect of long service leave for the two employees arose upon an examination of the terms of the particular award, and that, properly understood, such liability was substantially on all fours with the liability considered by the High Court in Flood's case (1953) 88 CLR 492 . The application of that decision he contended concluded the matter against the taxpayer. (at p54)
The Commissioner's submission that the starting point was an examination of the terms of the particular award was not in issue between the parties, and in fact is in accord with the decision of the court (Dixon C.J., Webb, Fullagar, Kitto and Taylor JJ.) in Flood's case: "However serviceable generalized conceptions may be in relieving overburdened assessors and tax accountants of the need of examining particular situations, all a court can decide is the 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" (1953) 88 CLR, at p 504 . (at p54)
It was agreed before us that for virtually all relevant purposes the liability of the taxpayer to provide long service leave is to be found in the Metal Trades (Long Service Leave) Award 1964 ("long service leave award") and that reference need only be made to Victorian legislation when it is expressly incorporated in the award (see for example cl. 6 (4) of the long service leave award). All relevant clauses of the award are set out by the trial judge in his reasons, and need not here be repeated. I will only refer to those expressly relied upon by the Commissioner. (at p54)
In Flood's case, which concerned the deductibility of a liability to employees for their holiday pay, the court held that the taxpayer company had not completely incurred a liability therefor at the end of the year of income: "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" (1953) 88 CLR, at pp 507-508 . Such a conclusion, the Commissioner here contended, could and should properly (upon the true construction of the award) be reached in respect of the two employees' entitlement in the present case. This was, he said, the necessary consequence of the fact that at 30th June, 1974, it was not possible to identify with certainty the amount payable to any particular employee or who would be making the payment. (at p55)
On the submission of the impossibility of identifying the amount payable, reliance was placed by the Commissioner upon the fact that the amount could not be quantified until the particular employee took his leave. Payment to him would then be calculated at the current rate of wage then prescribed. Clause 7 of the long service leave award provides for this entitlement and is as follows: "7 (1) Subject to the provisions of sub-cl. (2) hereof, the rate of payment to which an employee on leave shall be entitled shall be, in the case of a full-time weekly time worker, the rate of wage then currently prescribed for the standard weekly hours by the Metal Trades Award of this Commission for the area in which he was employed and for the classification in which he was classified by the employer immediately prior to his commencing leave; such rate shall not include shift premiums, overtime, penalty rates, commissions, bonuses or allowances payable to him when working. (2) Payment shall be made in one of the following ways - (a) in advance for the whole of the period when the employee commences the period of leave, at the rate calculated in accordance with sub-cl. (1) hereof; or (b) at the same time as payment would have been made if the employee had remained on duty, in which case payment shall, if the employee in writing so requires, be made by cheque posted to an address specified by him; or (c) in any other way agreed between the employer and the employee. Provided that if during the period of leave any change in the rate of pay applicable to the employee has been effected by variation of the Metal Trades Award of this Commission the rate of payment to which an employee on leave shall be entitled shall be, as from the date upon which such change is operative, such changed rate and if payment has been made in advance to any employee in respect of long service leave the employer shall, upon the employee's return to duty, adjust such advance payment to accord with such changed rate of pay, to the extent to which the changed rate is applicable." (at p55)
Relying on this clause the Commissioner contended that the liability was not incurred until it was possible to calculate exactly how much was payable to the employee for his period of leave. Prior to that time it was contended the liability had not been incurred, and the taxpayer had not been "definitively committed" thereto. Inherent in this submission was the fact that because of fluctuations in wage rate and the possibility of promotion or demotion, the ultimate liability of the taxpayer might and probably would either increase or decrease from the liability calculated at 30th June, 1974. (at p56)
The concept of a "definitive commitment" as an essential feature of a loss or outgoing deductible under s. 51 (1) was established by Flood's case: "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" (1953) 88 CLR, at p 506 . (at p56)
There was before us some speculation as to the significance to attach in the circumstances to the adverb "definitively". In my opinion it is the converse of an "open-ended" commitment or a commitment which is at large to the extent that it is not delimited or defined by the circumstances which raise the obligation. The word has been used in connexion with both a sentence for an offence, and the publication of a scheme, and in each instance there is to be found a reference back to the legislation, which "defined" the manner and form of publication or the range of sentence permissible, as the case may be: cf. Esnouf v. AttorneyGeneral for Jersey (1883) 8 App Cas 304 , Re Diptford Parish Lands (1934) 1 Ch 151 and Re Hackney Charities (1864) 34 LJ Ch 169 . (at p56)
In the present matter it is in my opinion the provisions of the award which defined the obligation and the extent of the commitment thereunder of the taxpayer. It is only the outgoing to the extent that the taxpayer is committed thereto to any particular time by the provisions of the award that is a definitive commitment of the taxpayer. (at p56)
In my opinion the Commissioner's challenge on this aspect of the matter is unacceptable, and I agree in its entirety with the reasoning of the trial judge. Not only is there ample authority that an estimate of the amount of a liability is sufficient to enable a deduction to be obtained (see R. A. C. V. Insurance Pty. Ltd. v. Federal Commissioner of Taxation (1974) 22 FLR 385 and Commercial Union Assurance Company of Australia Ltd. v. Federal Commissioner of Taxation (1977) 32 FLR 32 ) (and without doubt the calculation of the extent of the liability in this instance goes well beyond an "estimate" of the amount thereof), but the exact manner of calculation of the liability is predetermined i.e. "rate of wage then currently prescribed for the standard weekly hours" etc., cl. 7 (1) of the long service leave award. (at p57)

The Commissioner contends that it is only when the employee takes his leave that his exact entitlement can be calculated, because it is determined by the then ruling rate. However this submission is not in accordance with the terms of the award, for the employee is, pursuant to the proviso to cl. 7 (2) entitled, if rates of pay increase and he has been paid for the period of his leave prior to taking the same, to have that payment adjusted on his return to duty. (at p57)
In my opinion there is nothing in Flood's case (1953) 88 CLR 492 which supports the Commissioner's argument on this aspect of the matter and I endorse, without repeating, the trial judge's comments thereon. (at p57)
The next argument was again based upon a principle formulated in Flood's case (1953) 88 CLR, at p 506 , namely that the taxpayer must have "completely subjected" itself to the liability and there was no such complete subjection here because there was no certainty that the taxpayer would be the employer at the time the employee took his long service leave. Such a contention has its genesis in the fact that there always is the possibility of the disposal by the taxpayer of its business and the consequent application of the provisions of cl. 5 (5) of the long service leave award. This sub-clause is as follows: "Transmission of Business - 5 (a) Where a business is, whether before or after 11th May, 1964, transmitted from an employer (in this sub-clause 'the transmittor') to another employer (in this sub-clause called 'the transmittee') and an employee who at the time of such transmission was an employee of the transmittor in that business becomes an employee of the transmittee - (i) the continuity of the service of the employee shall be deemed not to have been broken by reason of such transmission; (ii) the period of service which the employee has had with the transmittor or any prior transmittor shall be deemed to be service of the employee with the transmittee. (b) In this sub-clause 'business' includes trade process business or occupation and includes part of any such business, and 'transmission' includes transfer conveyance assignment or succession whether by agreement or by operation of law, and 'transmitted' has a corresponding meaning." (at p57)
As I read these provisions, they contemplate that at the time of the disposal of the business the employee has the option of following the business and becoming an employee of the transmittee in which case the continuity of his service for the purpose of determining the amount of long service leave to which he is entitled is deemed not to have been broken. In truth of course it has been broken, and he has entered into employment with a new employer, but for the purpose of calculating the number of years of his continuous service, it is deemed that there has not been a break. His service with the new employer (the transmittee) is deemed to be a continuance of his service with the old employer (the transmittor). (at p58)
Alternatively the employee has the option of declining to accept employment with the transmittee and acknowledging that his service with his employer (the transmittor) has been terminated. In these circumstances the employee is entitled pursuant to cl. 6 (2) to his long service leave or a pro rata proportion thereof and under cl. 8 (2) to receive payment in respect thereof. (at p58)
If the employee elects to exercise the latter option the transmittee employer is relieved from his liability to accept the obligation of long service leave, but in this instance payment is to be made by the transmittor employer to the employee in lieu of granting leave. (at p58)
As to the former option, the transmittee if he employs all or any of the employees of the transmittor subjects himself (in consequence of cl. 5 (2) of the long service leave award) to the then existing obligation to provide long service leave to these employees. It is a liability which he is obliged to accept upon taking over the business and any of its employees, and his acceptance of the liability almost certainly relieves the transmittor therefrom. It is certainly a liability which the transmittee would prudently take into account in his decision to acquire the business, and either adjust the purchase price accordingly or require a specific payment by the transmittor as consideration for the acceptance of the liability to the employees taken over. (at p58)
In these circumstances it seems to me that the taxpayer had a continuing obligation, regardless of whether or not it ultimately is in fact called upon to grant leave and make payment therefor. It cannot be said that the obligation was defeasible (and even if it was it is not fatal to the taxpayer, see Flood's case (1953) 88 CLR, at p 507 ) but that in certain circumstances, namely death of the employee, termination of employment of the employee for certain specified causes, or termination on transmission of the business the employer discharges his obligation otherwise than by granting leave with pay. In my opinion the taxpayer completely subjected itself to the liability when it took over the employment of Messrs. Aughton and Auty on transmission of the business. (at p58)
In this instance also I do not see the Commissioner as successfully challenging the trial judge's decision. (at p58)
Another issue for consideration is whether the decision in Flood's case has application to the facts in the present matter. It is my opinion that it has no direct application and can be distinguished therefrom on the grounds relied upon by the trial judge. (at p59)
The question for determination in that case was the deductibility under s. 51 (1) of an amount representing a provision for annual leave the liability for which it was contended had accrued in respect of a period in the year of income. The year of income was the year ended 30th June, 1947, and it was contemplated that the employees would commence their leave in December 1947. What the company claimed to deduct, as the court viewed the matter (Flood's case (1953) 88 CLR, at p 503 ), was an amount representing its calculation of that part of the annual leave entitlement of its employees, which had accrued between 1st January and 30th June, 1947. The crucial fact which distinguishes that case from the present matter was that at 30th June, 1947, the employees had not by their service qualified themselves for any annual leave. By the terms of the relevant award an employee was only entitled to annual leave after twelve months' continuous service (less the period of annual leave) and the employees had not served for such a period at 30th June, 1947. It is in these circumstances that the High Court stated the ratio of its decision: "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 ensuing 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 futuro. 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. It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30th June 1947, become predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means it is imposed in the form of a liability associated with the operations of the taxpayer for the ensuing year. In short the deduction claimed of 578 Pounds.10s.2d. does not represent an expenditure associated with the production of income before 30th June 1947 for which a liability had been completely incurred before that date" (my italics) (1953) 88 CLR, at pp 507-508 . (at p59)
It seems to me that the court has taken pains to emphasize that because the employees in that case had not qualified for any annual leave at 30th June, 1947, the liability at that date in respect of annual leave was an inchoate liability, which had not accrued but was in the process of accrual. For the same reason liability for annual leave had not been completely incurred by the company at that date. If the employees had at that date qualified by service to take annual leave in the next year, the liability would have been completely incurred at 30th June, 1947. In which case it would have been a liability associated with the operations of the taxpayer for that year of income, and not, as the court stated to be the case, for the ensuing year. (at p60)
Here by contrast the position was that the two employees had at the end of the year of income qualified for long service leave by their service with the taxpayer. The liability for payment therefor was not an inchoate liability in the process of accruing. It was a liability completely incurred, the quantum of which in the ordinary course was increasing each year that the taking of the leave was postponed. In these circumstances the trial judge in my opinion correctly distinguished the decision in Flood's case. (at p60)
With these considerations in mind it is perhaps appropriate to turn to the other matter appealed by the Commissioner, the allowance of a deduction in respect of annual leave and the cross appeal by the taxpayer in this respect. (at p60)
The taxpayer's claim to deduct annual leave expense related as I have said to two classes of employees, those who had worked in its employment for over twelve months and those who had not. (at p60)
Again the crux of the matter is the proper interpretation of the award, which is agreed to be the Metal Industry Award 1971. The trial judge has set out in his reasons the relevant provisions of the award and they need not here be repeated. The Commissioner conceded that there was nothing in the award which would require it to be construed differently from the award under consideration in Flood's case (1953) 88 CLR 492 . It follows that it is then a matter of applying the ratio of that decision to the facts of this matter. This has in my opinion been correctly done by the trial judge differentiating between those who have served the qualifying period of twelve months and those who have not. In respect of the former class of employees the liability had been completely incurred at 30th June, 1974, and the amount thereof was deductible. (at p60)
In respect of those who had not completed the qualifying period, the liability was inchoate and in the process of accruing. The trial judge correctly decided that in this regard the assessment should stand. (at p60)
Lastly, I turn to the taxpayer's challenge to the trial judge's finding that in respect of the long service leave liability a deduction was only available in respect of the increment which accrued in the year of income in consequence of wage increases and a further year's service. (at p61)
The taxpayer for its part submitted that the total outstanding amount of its liability for long service leave for qualified employees should be deductible in the year of income as being a loss or outgoing incurred in that year. Its counsel conceded that it is only losses or outgoings which are incurred in the year of income which are deductible in that year. If the particular loss or outgoing was incurred in a previous year it was not deductible in a subsequent year. It is of course accepted that a loss or outgoing is not incurred only when the actual expenditure is made. It is incurred in the year in which the taxpayer is "definitively committed" to the expenditure, even though it is not discharged until a subsequent year: cf. Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation per Latham C.J. (1944) 71 CLR, at p 606 . (at p61)
Moreover as Latham C.J. said in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 CLR 382 : "The law does not insist that when a credit system of accounts has been adopted so that an expenditure is deducted when it is incurred (whether or not the liability which it represents has actually been discharged by payment) it is thereafter impossible to make a further deduction on the same account in a subsequent year when it turns out that a larger expenditure than that anticipated must actually be made in order to discharge the liability" (1940) 63 CLR, at p 427 . (at p61)
The trial judge in the present case held that the taxpayer's liability in respect of the relevant employees' entitlements to long service leave had not, except to the extent of the increment arising out of the year of income, been incurred in that year but in previous years. In these circumstances he held, and in my opinion correctly, that this portion of the liability, not having been incurred in the year of income, could not be deducted in that year under s. 51 (1) of the Act. (at p61)
The taxpayer submitted before us to the effect that the total liability for long service leave (and not merely the increment in the year of income) was incurred in the year of income because it was in that year, it was contended, that the taxpayer completely subjected itself for the first time to the liability. In years prior thereto, it was argued, the taxpayer had not subjected itself to the liability because it accepted the Commissioner's practice as allowing a deduction only when payments for long service leave were actually made. Therefore it had made no claim in those years for any deduction. (at p61)
It is my opinion that the taxpayer had subjected itself to this liability (other than the current year's increment) in the preceding years. In respect of these two employees it subjected itself completely to a liability at the time it employed them, on the acquisition of its business from their previous employer. In addition each year thereafter by retaining these men as employees in its business it subjected itself to liability for the annual increment. (at p62)
The taxpayer contended that it had only completely subjected itself to the liability in the year of income because this was the first year in which it made provision in its accounts for its total liability and claimed a deduction for the amount thereof. Even if such a circumstance could amount to a subjection to a liability, and I do not believe that it does, it is significant that this occurred for the first time in the year of income only in the accounts as adjusted for the purposes of its return of income for tax purposes. In its commercial accounts the profit had always been raised after charging each year the amount of the provision made in respect of that year to cover the company's liability for long service leave. (at p62)
In my opinion the appeals of both the Commissioner and the taxpayer should be dismissed. (at p62)

ORDER

Commissioner's appeals allowed with costs.

[1979] FCA 101

08 OCTOBER 1979