Federal Commissioner of Taxation v Northern Timber and Hardware Co Pty Ltd

[1960] HCA 93

HIGH COURT OF AUSTRALIA

Fullagar, Kitto and Menzies JJ.

FEDERAL COMMISSIONER OF TAXATION v. THE NORTHERN TIMBER AND HARDWARE CO. PTY. LTD.

(1960) 103 CLR 650

16 December 1960

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Allowable deductions—"Provision for individual personal benefits etc . . . for employees of taxpayer"—"Sets apart or pays . . . a sum as or to a fund"—Provision in books of account for prospective liability in respect of long service leave—Not deductible—Labour and Industry Act 1953 (Vict.), Pt. VIII, Div. 4—Income Tax and Social Services Contribution Assessment Act 1936-1955 (Cth), s. 66.*

Decision

December 16.
THE COURT delivered the following written judgment:-
The case, which Fullagar J. has stated pursuant to s. 18 of the Judiciary Act 1903-1960 upon an appeal by the Commissioner from a majority decision of the Board of Review No. 2, raises the question whether a provision of 436 pounds, being part of a larger provision of 586 pounds 19s. 11d. made by the respondent taxpayer in its books of account during the year ended 30th June 1955 to meet its prospective liabilities in respect of long service leave to be granted to workers under Div. 4 of Pt. VIII of the Labour and Industry Act 1953 (Vict.), is deductible in the assessment of its taxable income for the year ended 30th June 1955. If this amount is deductible, it must be by virtue of s. 66 of the Income Tax and Social Services Contribution Assessment Act 1936-1955. The deduction claimed cannot be justified under s. 51 of the Act (Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 , but at the hearing and notwithstanding the form of the questions asked in the case stated, it was sought to rely upon s. 51 to justify the deduction of an amount which could be regarded as having become payable to one employee of the taxpayer who in the tax year with which we are concerned had become entitled to three months long service leave. As to this, it is only necessary to say, as was pointed out in the course of the argument, that because the taxpayer's notice of objection plainly relates to the provision made in its books to meet future liabilities and not to an actual liability for a sum less than this provision, this ground was by reason of s. 190 (a) of the Act not open to the appellant; and no more need be said about it now. (at p655)

2. Section 66 provides for an allowable deduction when in the year of income an employer "sets apart or pays . . . a sum as or to a fund" from which to provide individual personal benefits, etc. for employees or their dependants and "the rights of the employees or dependants to receive the benefits . . . are fully secured". (at p656)

3. Division 4 of Pt. VIII of the Labour and Industry Act 1953 entitles workers to long service leave in respect of continuous employment with the same employer and requires the employer to pay what is described as "ordinary pay" to workers on long service leave. Here it is not necessary to describe the Division in greater detail than to say that (1) twenty years continuous service gives a worker an absolute entitlement to thirteen weeks long service leave; (2) service over and above twenty years entitles the worker to long service leave at the rate of one-eightieth of the additional service unless the worker is dismissed for serious and wilful misconduct or leaves his employment without pressing necessity; and (3) service of more than ten but less than twenty years which has ended entitles the worker to such an amount of long service leave as equals one-eightieth of the period of continuous employment unless the worker is dismissed for serious and wilful misconduct or leaves his employment without pressing necessity. From this it is apparent that no worker who has not completed twenty years service can be absolutely entitled to long service leave, but any worker who has completed ten years continuous service may become entitled to long service leave by virtue of that service. (at p656)

4. In Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 , 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. This claim is, in effect that an employer, whether a company or an individual, may, by doing no more than making a book entry debiting annual profits with some sum described as a contribution towards what will have to be paid in the future as long service leave pay, obtain under s. 66 of the Act a deduction of the amount of the entry. (at p656)

5. To this claim there are a number of answers. The first is that in so doing the employer does no more than make such provision as it thinks fit to meet liabilities that will arise under the Labour and Industry Act. It would be a strained construction of s. 66 to regard such a provision as one "for individual personal benefits . . . for . . . employees". The Labour and Industry Act gives workers rights to long service leave with pay and imposes corresponding liabilities upon employers. Even were an employer to put aside funds to meet its prospective liability for long service leave pay, it would not be doing anything for its employees: it would be making savings to meet what it will, as a matter of strong probability, have to pay under the Act in the future, but, as has already been said, in this case the employer did no more than make a book entry. This leads to the second answer to the taxpayer's claim. (at p657)

6. It is that to make a book entry and no more does not come within the words "sets apart . . . a sum as or to a fund" from which pay for long service leave is to be provided. What the taxpayer did here had no legal effect whatever. The employer gave nothing and the employees gained nothing. There may in some cases be a question whether what an employer has done amounts to setting aside a sum as and to a fund, but such a question will only arise when the employer has done something that is binding and confers some benefit upon employees. (at p657)

7. Finally, a deduction under s. 66 is conditional upon the rights of the employees to receive the benefits being fully secured. This in the context must mean that the employees have secured rights to receive out of the fund the benefits that it is established to provide. Here, even if what the taxpayer did could be regarded as creating a fund, it would be a fund under its unfettered control to deal with as it chose and to be unmade as it was made, viz. by a stroke of a pen. It would be a fund which provided the employees with no security of any sort. (at p657)

8. For these reasons the question asked in the case stated should be answered No.

Orders

Question in the case stated answered No. The respondent taxpayer to pay the Commissioner's costs of the case stated. (at p657)