Federal Commissioner of Taxation v Foxwood (Tolga) Pty Ltd

[1981] HCA 24

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Murphy, Aickin and Wilson JJ.

FEDERAL COMMISSIONER OF TAXATION v. FOXWOOD (TOLGA) PTY. LTD.

(1981) 147 CLR 278

2 June 1981

Income Tax (Cth)

Income Tax (Cth)—Deductions—Long service leave—Annual leave—Sale of business—Transfer of employment—Amounts paid by seller to buyer of business in respect of employees' accrued entitlements—Whether deductible—Income Tax Assessment Act 1936 (Cth), s. 51 (1).

Decisions

1981, June 2.
The following written judgments were delivered: -
GIBBS C.J. The facts of this case, and the effect of the statutory provisions relevant to long service leave and holiday pay, are set out in the reasons for judgment prepared by my brother Mason which I have had the advantage of reading. Stated briefly, they are as follows. The respondent ("the taxpayer") was a company which, for a fee, made the services of its employees available to an associated company. On 29 June 1976 the respondent entered into a contract for the sale of its business to another associated company. By cl. 25 of the contract the purchaser agreed to take over all the taxpayer's employees employed in its business on 30 June 1976, and further agreed that on and from that date the purchaser should "be liable to make holiday, sick leave and long service leave payments accruing or owing before or after that date", provided that the taxpayer should pay to the purchaser an amount to be determined "as the employees' accrued entitlement for long service leave and holiday and sick pay". On 30 June 1976 the taxpayer paid the purchaser the amount determined in the manner provided by cl.25. The total amount paid was $11,658, and the taxpayer claims that $8,897, the part of that amount which is said to represent the "accrued entitlement" of the employees for long service leave and holiday pay, should be allowed as a deduction from its assessable income for the year ended 30 June 1976. The effect of s.17 of the Industrial Conciliation and Arbitration Act 1961(Q.), as amended, was that none of the employees whose services were transferred by the taxpayer to the purchaser was entitled to be paid anything by the taxpayer in respect of long service leave; the period of service of each employee with the taxpayer would be taken into account in calculating the length of his service with his new employer (the purchaser) and would be deemed to be service with that employer (s. 17(7) (b)). On the other hand, the effect of s. 15 of that statute, and of the relevant award, was that when the employment of each employee by the taxpayer was terminated, each employee became entitled to be paid the amount of his holiday pay, or a fraction of that amount, depending on the period of his service since he last became entitled to his annual holiday. In the present case it is a question, which is not resolved by any express finding of the learned trial judge, whether the services of the employees were terminated on 30 June 1976 or on 9 July 1976, when the employees were first told of the new arrangements, and I shall assume, without deciding, that their services were not terminated until 9 July. The amount of $8,897 claimed is made up of $5,984, the amount payable to the employees in respect of their holiday pay at the date when their services were terminated, and $2,913, the amount which would have been payable to certain employees in respect of long service leave if their services had been terminated and not transferred to a new employer. (at p283)

2. Section 51 (1) of the Income Tax Assessment Act 1936 (Cth), as amended, provides as follows:
"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 domestic nature, or are incurred in relation to the gaining or production of exempt income."
The provisions of s. 51 (3), which deal expressly with deductions in respect of long service leave, annual leave sick leave or other leave, were not in force at the time material to the present case. (at p283)

3. It is clear that the outgoing in respect of which a deduction is claimed was incurred during the year of income - the amount was actually paid during the income year. The present case therefore does not raise the question, which was discussed in Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 and Nilsen Development Laboratories Pty. Ltd. v. Federal Commissioners of Taxation (1981) 144 CLR 616 , whether an outgoing could be said to have been "incurred" within the meaning of s. 51 (1) when no payment had actually been made, and the liability in respect of holiday pay or long service leave was still inchoate. The questions that arise in the present case are whether the outgoing was incurred in gaining or producing the assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income, and if so whether it was of a capital nature. (at p283)

4. It does not appear to matter whether the present case is regarded as falling within the first or the second category described in s. 51 (1). The two categories are not mutually exclusive (John Fairfax &Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR 30, at p 40 ), and "in actual working" (the alternative in s. 51 (1)) "can add but little to the operation of the leading words, 'losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income"' (Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47, at p 56 ). The effect of the "leading words" is explained in a well known passage in Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR, at pp 56-57 , as follows:
"For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words 'incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income. . . . In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income."
The word "necessarily" in the words describing the second category appears to mean no more than "clearly appropriate or adapted for": Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation. The outgoing claimed as a deduction in the present case formed part of a larger item of expenditure but it is clear that it is permissible to make an apportionment or dissection of a loss or outgoing and to treat part of it as deductible: Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR, at p 55 ; Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. (1978) 140 CLR 645, at p 654 . (at p284)

5. There can be no doubt that a payment by a taxpayer to an employee of an amount due in respect of long service leave or holiday pay will fall within both categories of s. 51 (1), provided of course that the employee is employed in a business of the taxpayer which is carried on for the purpose of gaining or producing assessable income. The obligation to make such a payment will have arisen by reason of the employment of the employees in the business and a payment in fulfilment of the obligation will plainly be made in the course of gaining or producing the assessable income, and will be incidental and relevant to that end, and will be of a revenue character. Such a payment will be deductible in the year in which it is made. The fact that the taxpayer intends to close down his business makes no difference - the payments of the amounts due to the employees for leave or holiday pay, like amounts due for wages, will not cease to answer the description set forth in s. 51 (1) because the business in which the employees were engaged is about to come to an end. In the present case an amount of $5,984 did become payable to the employees of the taxpayer on the termination of their services, and if that had occurred on 30 June, and if the taxpayer had made the payment to them directly on that date, it could not have been argued that the payment was not deductible. However, counsel for the Commissioner submits that the fact that the payment was made to the purchaser rather than to the employees means that it should be regarded as a payment made for the purpose of discharging a contractual obligation undertaken in the course of and for the purpose of disposing of a capital asset, and further relies on the circumstance that at the time when the payment was made the holiday pay had not become due and payable because the employees' services had not yet been terminated. (at p285)

6. The fact that the payment in respect of holiday pay was not made directly to the persons entitled to receive it does not necessarily mean that the payment assumes a different character. In Federal Commissioner of Taxation v. Morgan (1961) 106 CLR 517 a taxpayer, who had purchased land which produced assessable income in the form of rents, paid to the vendor a sum arrived at by making an apportionment of the rates in the usual way, and the amount so paid was held to be deductible under s. 51 (1). The rates had already been paid by the vendor, and under the contract of sale the purchaser was required to pay the proportion attributable to so much of the period covered by the rates as remained unexpired at the date of possession. The Court held that since the rates were actually borne by the taxpayer it was immaterial that he had not paid them to the rating authority directly, but had reimbursed them to the vendor (1961) 106 CLR, at p 522 . The character of an outgoing "can be determined only in relation to the object which the person making the expenditure has in view": W. Nevill and Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR 290, at p 301 . The question "What was the object of the expenditure?" must be answered from a practical and business point of view: see the statement of Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634, at p 648 which has often been cited and which I discussed in Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. (1978) 140 CLR, at p 659 . Although the payment to the purchaser of the amount payable to the employees for holiday pay would not have relieved the taxpayer of his liability to the employees if the purchaser, in breach of its obligation to the taxpayer, failed to pay the employees, there is no reason to suppose that the purchaser would or did fail to carry out its obligations. From a practical, although not from a legal, point of view the payment discharged the obligation of the taxpayer to the employees. It would be too narrow a view to hold that the object of the payment was to enable the purchaser to pay the employees; the object, revealed by cl. 25 of the contract, was to discharge the obligation of the taxpayer to the employees by paying the requisite amount to the purchaser and obliging him to pay the employees. The payment therefore had the same character as a payment made directly to the employees would have had. It should be emphasized that there is no suggestion that the transaction was a mere sham, and no evidence that it was carried out with a view to evade or avoid tax. (at p286)

7. For these reasons, if the obligation to make a payment in respect of holiday pay had arisen on 30 June 1976, the amount of $5,984 would have been deductible. In my opinion the fact that, on the assumption made, the obligation did not arise until 9 July 1976 makes no difference. As I have said, the outgoing was incurred on 30 June 1976 when the payment was made. In the circumstances of the present case, the object and character of the payment were not altered by the fact that it was made nine days before the obligation legally arose. From a practical point of view, the taxpayer was entitled to regard the services of its employees as having been terminated on 30 June, and to consider that it was bound to discharge its obligations to them as at that date. (at p286)

8. For these reasons the payment of $5,984 in respect of holiday pay was an allowable deduction under s. 51 (1). (at p286)

9. The position with regard to the payment of the amount said to be in respect of long service leave is however different. The effect of the contract for the sale of the business, and the transfer of the services of the employees to the purchaser, was that the taxpayer was not liable, and never could become liable, to pay anything to his former employees in respect of long service leave. It is impossible to say that the object of the payment of $2,913 was to discharge a liability which did not and never could exist. By this part of the payment the taxpayer made a contribution to assist the purchaser of the business to discharge obligations which would be expected to bind the purchaser in the future. It was not an unreasonable provision to make in a contract for the sale of the business. A payment of that kind was not incidental or relevant to the gaining or producing of the taxpayer's income or clearly appropriate to or adapted for that purpose; it was incidental and relevant to the sale of the business. The amount of $2,913 paid in respect of long service leave is therefore not deductible within s. 51 (1). (at p287)

10. The conclusions which I have reached were also reached by the majority of the Federal Court of Australia. The Commissioner of Taxation appealed against that decision in so far as it related to holiday pay, and the taxpayer cross-appealed in relation to long service leave. For the reasons that I have given I would dismiss both the appeal and the cross appeal. (at p287)

MASON J. This is an appeal by the Commissioner of Taxation and a cross appeal by the taxpayer from an order of the Federal Court of Australia partly allowing an appeal by the taxpayer against a decision of the Supreme Court of Queensland which had dismissed an appeal against an income tax assessment issued by the Commissioner. The issue is whether $8,897 paid in the year of income ended 30 June 1976 ("the tax year") by the taxpayer and said to represent the legal entitlement of employees of the taxpayer to long service leave and holiday pay is deductible pursuant to the provisions of s. 51 (1) of the Income Tax Assessment Act 1936, as amended ("the Act"). (at p287)

2. The taxpayer was at relevant times a subsidiary of Foxwood Ltd. ("Foxwood"). During the tax year the taxpayer made the services of its employees available to another subsidiary of Foxwood for a fee. Apart from this fee the taxpayer's only income consisted of bonuses payable under worker's compensation policies and interest on moneys owing to it. (at p287)

3. On 29 June 1976 the taxpayer entered into an agreement with Foxwood whereby it agreed to sell to Foxwood, with effect from 30 June 1976, all its undertaking and business (subject to an immaterial exception relating to shares in related companies). Clause 25 of the agreement provided:
"The Purchaser shall take over all the Vendor's employees employed in the Vendor's business on the 30th June 1976 and on and from that date the Purchaser shall be liable to make holiday, sick leave and long service leave payments accruing or owing before or after that date provided that the Vendor shall pay to the Purchaser on the 30th June 1976 an appropriate amount as shall be determined by C.E. Smith &Co. as the employees' accrued entitlement for long service leave and holiday and sick pay." (at p287)

4. The amount determined as appropriate, $11,658.78, was paid by the taxpayer to Foxwood on 30 June 1976. The amount in issue, $8,897, represented the total of the amounts which the taxpayer would have been obliged to pay to its employees in respect of long service leave ($2,913) and annual holiday entitlement ($5,984) if their employement had terminated on 30 June 1976. No claim for a deduction was made in respect of sick leave. To bring the payment within s. 51 (1) the taxpayer must establish that it was an outgoing incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income and was not of a capital nature. Section 51 (3) inserted by s. 3 of Act No. 171 of 1978 does not apply to the tax year. (at p288)

5. In the Federal Court there was a dispute as to the date of the alleged termination by the taxpayer of the services of its employees. The employees were paid by the taxpayer on Friday, 2 July for the week ended Wednesday, 30 June in accordance with the usual practice. On Friday, 9 July 1976 the employees, then paid by Foxwood, confirmed in writing a note from the secretary of Foxwood stating that they were employed by Foxwood as from 1 July 1976. The trial judge did not state explicitly the date when the contracts of service were terminated. However, both Deane and Davies JJ. in the Federal Court found that the contracts of service of the employees were not terminated until after 30 June 1976. (at p288)

6. The entitlement of the employees of the taxpayer to long service leave and annual or holiday leave or pay in lieu of leave at the relevant time was governed by the provisions of the Industrial Conciliation and Arbitration Act of 1961 (Q.), as amended ("the Queensland Act") and relevant awards. (at p288)

7. Section 17 of the Queensland Act provides for the insertion in awards of provisions "entitling employees to long service leave on full pay under, subject to, and in accordance with the provisions of this section". The provisions of s. 17 were incorporated in the awards governing the two employees upon whose long service leave rights the appellant relied. Essentially an employee is entitled by virtue of his award to thirteen weeks' leave on full pay after fifteen years' continuous service, and a proportionate amount after ten years' continuous service if that service was terminated by the employee, by the employer otherwise than for serious misconduct, or by the death of the employee. Somewhat similar provisions apply to service after completion of the initial period of fifteen years. (at p288)

8. The effect of s. 17 (7) (b) of the Queensland Act if the services of an employee are transferred by one employer to a second employer, whether by operation of law or agreement, is that the service of the employee is deemed to be continuous. The consequence is that the new employer alone has full responsibility for the long service leave of the transmitted employee. (at p288)

9. Entitlement for holiday leave is also provided for by the combined effect of the Queensland Act, s. 15, and the relevant awards. At the end of each year of employment, employees are entitled to four weeks' holiday leave on full pay, and to be paid for that leave. Section 15 (4), which by force of s. 15 (5) applies with respect to employment for less than one year, ensures that an employee whose services are terminated before the expiration of a full year of employment still receives a proportionate amount of holiday leave pay. There are no provisions which correspond to the transfer provision in respect of long service leave. (at p289)

10. At the end of the tax year only one of the taxpayer's employees had become entitled to take his annual holiday. The remainder, not having served the qualifying period since last taking leave, had no right to holiday pay unless their employment was terminated. The amount of $5,984 claimed was paid by the taxpayer to Foxwood as the amount which would have been payable under the awards to the employees if their services had been terminated by the taxpayer on 30 June 1976. (at p289)

11. In the Supreme Court of Queensland, Dunn J. rejected the taxpayer's claim to deduct any part of the payment of $8,897 to Foxwood. In the Federal Court, Deane J. would have allowed the taxpayer's appeal for both the long service leave and holiday pay components. Fisher J. would have dismissed the appeal and Davies J. would have allowed the appeal in relation only to the claim of $5,984, being that part of the payment on 30 June 1976 relating to holiday pay. (at p289)

12. The Commissioner appeals against the allowance of that sum and the taxpayer cross-appeals against the dismissal of its claim of $2,913, being that part of the payment on 30 June 1976 relating to long service leave. (at p289)

13. This Court has had occasion to consider claims involving provisions for long service leave and annual holidays under s. 51 (1) of the Act (see, e.g., Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 and more recently Nilsen Development Laboratories Pty. Ltd. v. Federal Commissioner of Taxation (1981) 144 CLR 616 ). But the circumstances in those cases were significantly different from those involved here. The fundamental distinction is that here the taxpayer claims a deduction based, not upon the existence of a liability or the making of an accounting provision, but upon a payment which has already been made. (at p289)

14. Accordingly, the established principle that there is no entitlement to a deduction until the taxpayer makes a payment to an employee when he takes his leave or when his services are terminated, does not of itself defeat the claim. And as the payment was made, not to the employees, but to Foxwood, there is no pricise analogy with a payment made by an employer to the employees which would have been deductible. There is no evidence of any obligation on Foxwood as payee to hold the money or an equivalent amount for the benefit of the employees so it is unnecessary to consider what type of trust arrangement, if any, could be seen as equivalent to a direct payment to the employees. (at p290)

15. The competing characterizations suggested as applicable to the payment are -
(1) That it was made for the purpose of discharging a contractual obligation undertaken in, and for the purpose of, disposing of a capital asset. It was really an adjustment of the purchase price. On this view the payment was made, not in the course of operations directed to the production of assessable income, but because the taxpayer had decided to cease production of assessable income by the hiring out of its employees.
(2) That the object sought to be achieved by the payment was the removal from the taxpayer to the purchaser of the burden of the taxpayer's obligations to its employees in respect of annual and long service leave on account of past periods of service. These obligations arose from the day-to-day business operations of the taxpayer though their time of crystallization would vary according to circumstances. Thus the outgoing was necessarily incurred in carrying on the business of producing assessable income, even if this was assessable income of a previous year (see A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation (1975) 132 CLR 175 ). (at p290)

16. If the first characterization be correct, the payment has the character of capital, being a payment not made for the purpose of producing assessable income. On the other hand, if the second characterization be correct, the payment was made for the purpose of producing assessable income and was not of a capital nature. With respect, I agree with Deane J. that there is no compelling reason either in logic or common sense for preferring one characterization to the other. (at p290)

17. The taxpayer placed great reliance on Federal Commissioner of Taxation v. Morgan (1961) 106 CLR 517 . There, a taxpayer was the purchaser of a rent-yielding property. The vendor had paid the assessments already issued for municipal and water rates prior to the date of settlement. On settlement the rates were apportioned between vendor and purchaser and the taxpayer as purchaser was required to pay a sum to the vendor in respect of so much of the period covered by the rates paid as on the date of settlement remained unexpired. The Court (Dixon C.J., Kitto and Windeyer JJ.) held in a joint judgment that this sum was deductible pursuant to s. 51 (1). It was not a loss or outgoing of capital but was an outgoing incurred in gaining or producing assessable income. The Court emphasized that "the vendors are reimbursed simply because they happen to have paid the rate" (1961) 106 CLR, at p 520 . Rates were recurrent and inherently an outgoing on account of revenue as they were incurred in respect of the enjoyment of the land or its rents and profits and accrued periodically. Nor should they be viewed as representing a payment for the land as a capital asset: "The payment of the apportioned part is separate and represents nothing but the reimbursement of a charge for an ensuing period of enjoyment" (1961) 106 CLR, at p 521 . The apportionment varied with the time of settlement which highlighted the fact that the payment was incurred for a period of enjoyment and was not inherently of a capital nature. It did not matter that the taxpayer did not pay the rates directly to the council or water authority, but reimbursed the previous owner for the rates so far as they related to the taxpayer's period of enjoyment of the rents. This was sufficient for the rates to be "paid or actually borne by the taxpayer" (1961) 106 CLR, at p 522 . (at p291)

18. The present case resembles Morgan (1961) 106 CLR 517 in several respects. The payment was made by the taxpayer to Foxwood and not to the employees directly. The amount of liability for long service and holiday leave, though inchoate, varied according to the date of termination of employment and the payment was to reimburse the new owner for the liabilities so far as they related to the taxpayer's employment of the employees. (at p291)

19. However, in Morgan the relevant legislation provided that when an occupier or owner ceased to be the occupier or owner of the rated land before the end of the period in respect of which the rates were assessed, that occupier or owner as between himself and the succeeding occupier or owner would be liable to pay a portion only of the rates payable for the whole of that period proportionate to the time during which he continued to be the owner or occupier. A liability was imposed on the owner or occupier during the remainder of the period to pay his proportion of the rates. The Court observed that it was "not clear whether the liability spoken of is between them, inter se, or to the rating authority" (1961) 106 CLR, at pp 519-520 . As the vendor had paid the rates in advance there was no existing liability to pay the rating authority and the taxpayer-purchaser's sole liability was to the vendor. Payment by the purchaser therefore discharged his liability. (at p292)

20. Here, as at 30 June 1976, the taxpayer-vendor was under no presently enforceable liability, apart from, or as the result of, the term of the contract with Foxwood. The taxpayer conceded that it did not obtain a legal discharge from its employees by paying Foxwood. The payment, though discharging a liability imposed in the contract of sale, did not discharge the inchoate liability of the taxpayer to its employees for holiday pay created by s. 15 of the Queensland Act and the relevant awards. That inchoate liability for holiday pay became actual when the contracts of employment were terminated after the end of the tax year. Section 15 contained no provision transferring the taxpayer's liability for holiday pay to the purchaser. The taxpayer continued to be liable for it notwithstanding the payment which it made to the purchaser. (at p292)

21. It was otherwise with long service leave. Section 17 (7) (b) transferred the inchoate liability of the taxpayer to the purchaser, but the transfer occurred when, and not before, the services of the employees with the taxpayer were terminated. As I have already indicated, it is my view that thenceforth the taxpayer was under no liability to its former employees for any part of the long service leave to which they might become entitled ultimately. The effect of the disposition of the business and the termination of the services was to extinguish the taxpayer's liability for long service leave after the end of the tax year. (at p292)

22. Mr. McPherson, for the Commissioner, argued that because the payment to the purchaser could not and did not ensure that the inchoate liability of the taxpayer to its employees would not become presently enforceable at a later date then "payment, with the knowledge that it would not discharge that liability could not have been a payment for the purpose of discharging that liability". (at p292)

23. In considering this submission, we must distinguish between holiday pay and long service leave. As we have seen, the taxpayer became liable for holiday pay. The provision made by the contract for the payment to the purchaser of an amount in respect of holiday pay can be seen as the means selected by the parties of satisfying a liability on the part of the taxpayer which would come into existence once the services of the employees were terminated as contemplated by the contract. True it is that the payment was not made to the employees and for this reason it was not a legally effective discharge, the employees having the right to sue the taxpayer and recover unpaid holiday pay from it. But plainly enough it was contemplated that the rights of the employees would be satisfied by the purchaser and the payment made enabled it to do that. It may be said, then, that the payment was made for the purpose of enabling the purchaser to discharge a liability of the taxpayer which was bound to arise in consequence of the contract and of the arrangements for which it provided. Payment of holiday pay by the purchaser in respect of service with the taxpayer would enable the taxpayer to sustain a plea of payment in the event that the employees sued it (Belshaw v. Bush (1851) 11 CB 191, at pp 206-207 (138 ER 444, at p 450) ). (at p293)

24. The payment as a matter of business or commercial practice effectively relieved the taxpayer from an obligation to pay its employees for annual holidays it would otherwise have been subject to. The fact that circumstances, such as Foxwood going into liquidation, can be envisaged where the taxpayer might be compelled to make additional payments, this time to its former employees, is not sufficient to exclude the payment from s. 51. This accords with the accepted view that courts in characterizing outgoings in fact incurred in a business or commercial context are entitled to examine what the expenditure was "calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process" (Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634, at p 648 , per Dixon J.). (at p293)

25. As I have already indicated, Flood (1953) 88 CLR 492 and Nilsen (1981) 144 CLR 616 are to be distinguished. There, the Court was concerned to characterize provisions made or sought to be made against future liability and it was correct in such a context to give emphasis to the presence or absence of legal rights and liabilities in order to determine whether any outgoing had been incurred in gaining or producing assessable income. Here, our task is to characterize a payment which has in fact been made. The situation is one in which there is an outgoing; the problem is to ascertain its character. (at p293)

26. The payment in so far as it related to holiday pay is in my opinion indistinguishable from Morgan (1961) 106 CLR 517 . It is, however, quite distinguishable from Peyton v. Federal Commissioner of Taxation (1963) 109 C.L.R. 315, at pp. 320-321, where the payment was made, not in gaining or producing assessable income, but in the course of, and for the purpose of, disposing of a capital asset, the payment being made in respect of an amount for repairs as a condition of the lessor giving his consent to a transfer or parting with possession of the lease. It is therefore correct to characterize the payment for holiday pay as one made for the purpose of removing from the taxpayer the burden of its obligation to employees in respect of annual holiday pay on account of past periods of service and is within s. 51 because it is an expense incurred in the gaining or producing of assessable income. (at p294)

27. However, the very circumstance which enables me to conclude that the payment in respect of holiday pay is an allowable deduction is absent in the case of the payment made in respect of long service leave. As we have seen, the liability, if any, to arise in respect of long service leave was a liability of the purchaser, the inchoate liability of the taxpayer having terminated in consequence of the disposition of the business for which provision was made by the contract and the termination of the employees' services as contemplated by the contract. The payment made to the purchaser in respect of long service leave was therefore a contribution made in respect of its liability to accrue in the future. In no sense can it accurately be described as a payment made for the purpose of discharging a liability of the taxpayer. Consequently, the payment in respect of long service leave is not an allowable deduction. (at p294)

28. In the event I would dismiss both the appeal and the cross appeal. (at p294)

MURPHY J. I agree with the conclusions reached by Mason J. The appeal and cross appeal should be dismissed. (at p294)

AICKIN J. In this matter I have had the advantage of reading the reasons for judgment prepared by my brother Mason. I agree with those reasons and the conclusion that both the appeal and the cross appeal should be dismissed. (at p294)

2. There is nothing that I can usefully add to those reasons, save to say specifically that it does not appear to me to matter in these particular circumstances whether the employment was terminated on 30 June or 9 July. The company was committed by the agreement of 29 June 1976 to transfer its business and undertaking on 30 June and the purchaser was committed to take over the taxpayer's employees on that day. The payment was made on 30 June. So far as holiday pay is concerned it was a liability which arose from the carrying on of its business in the year ending 30 June 1976. It is true that the liability to make payments for holiday pay to the employees did not arise until 9 July on the view of the facts adopted by Deane and Davies JJ. but the taxpayer did not discharge that liability. The liability which it did discharge on 30 June was its liability under its contract with the purchaser of its business; but what the payment achieved was the effective de facto transfer of the burden of paying an amount about to become due and payable the liability for which arose out of the carrying on of its business in the year ended 30 June. (at p295)

WILSON J. I have had the advantage of reading the reasons for judgment prepared by Mason J. The facts are there set out. I agree with his Honour's conclusion, and substantially with the reasons advanced in support of that conclusion subject, however, to the comments which I now make. (at p295)

2. In my opinion, the important consideration touching the payment by the taxpayer of a sum for accuring long service leave is that the effect of s. 17 (7) (b) of the Queensland statute was to extinguish completely any liability of the taxpayer in respect of long service leave entitlements of the transmitted employees. By virtue of the Act, the purchaser of the business became solely responsible for that liability. This being so, the payment necessarily assumes the character of an adjustment to the purchase price on the sale of the taxpayer's business. It must therefore represent expenditure on capital account, and the taxpayer's claim to a deduction pursuant to s. 51 (1) must fail. (at p295)

3. The position with respect to holiday pay is different. I approach the problem on the basis that the employees ceased to work for the taxpayer at the close of business on 30 June 1976. It may be true enough that they did not know it at the time. But it was a most unusual situation. My conclusion rests on the particular circumstances, including the close connexion between the vendor and the purchaser, the terms of the agreement of 29 June, the fact that the purchaser paid the workers their wages from 1 July and their subsequent written acceptance of the arrangement. Until 30 June the taxpayer would not have been liable for holiday pay unless and until a worker proceeded on leave or had his employment terminated. However, when a termination of the employment eventuated on 30 June, the worker's entitlement under the award to holiday pay was crystallized. Strictly speaking, had they but known it, the workers could have demanded that they be paid there and then. However, the taxpayer agreed with the purchaser that provided it was willing to assume the taxpayer's liability to its employees in this respect then the taxpayer would pay to it on 30 June the amount in which by reason of the termination it had then become liable. This formed part of the arrangement which the workers subsequently accepted. It was no doubt a sensible arrangement, because the workers could reasonably have preferred to actually take their holidays later in the year rather than to receive their entitlement partly in cash. In any event, the fact that the taxpayer made a payment to the purchaser in respect of holiday pay on 30 June is irrelevant to the deductibility of the amount due to his workers in that regard on the termination of their employment. The outgoing was actually incurred on that date, whether or not it was actually paid: Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492, at p 507 . Likewise it is immaterial whether by making the payment to the purchaser the taxpayer discharged his liability to its employees. (at p296)

4. On this view of the circumstances, it seems to me that the payment of $5,984 on 30 June bore the character of an outgoing necessarily incurred in carrying on a business for the purpose of gaining assessable income and was therefore deductible under s. 51 (1). (at p296)

5. For these reasons I would dismiss both the appeal and the cross appeal. (at p296)

Orders

Appeal dismissed with costs.

Cross appeal dismissed with costs.