Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)Notes on Clauses
Clause 1: Short title, etc.
This clause provides formally for the citation of the amending Act and of the Principal Act.
Clause 2: Commencement
By section 5(1A) of the Acts Interpretation Act 1901 every Act is to come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent unless the contrary intention appears in the Act. By this clause, the amending Act, which will affect assessments for the 1977-78 income year, will come into operation on the day on which it receives the Royal Assent.
Clause 3: Losses and outgoings
This clause is designed to ensure that deductions in respect of the costs of employees' long service leave, annual leave or other leave are allowable in the assessments of tax for the year in which payment for the leave is made.
Under section 51 of the Principal Act, deductions are allowable generally for losses or outgoings that are not of a capital or private nature and are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose. It has been established practice to treat this section as permitting a deduction in the year of payment - and not beforehand - for amounts paid by employers to their employees in respect of leave and for amounts paid in lieu of leave to retiring employees or to dependants or legal personal representatives of deceased employees.
The correctness of this practice has, however, been placed in doubt by a recent decision of a Supreme Court in the case of Nilsen Development Laboratories Pty Ltd v F.C. of T. (78 A.T.C. 4335 - 8 A.T.R. 760). In its decision, the Court found that a liability to make a payment in respect of long service or annual leave could be incurred, and thus be deductible in a year of income prior to that in which actual payment for the leave is made. This matter will be reviewed on appeal and there is a possibility that it could be decided on appeal that employers are not entitled to deductions in years when their employees receive payments for leave which became due (and in the Court's view, deductible) in a prior year, but for which deductions were not then allowed. The amendment will clarify both aspects, in relation to 1977-78 and subsequent income years.
Sub-clause (1) of clause 3 proposes the insertion of a new sub-section - sub-section (3) - in section 51 to provide specifically that a deduction is not allowable under the section in respect of long service leave, annual leave, sick leave or other leave except for an amount actually paid to the person to whom the leave relates or, if the person is deceased, to a dependant or personal representative. The sub-section will also make it clear that the deductible amount is not to be treated as a loss or outgoing incurred at any time other than the time when the payment is made.
Sub-clause (2) governs the application of the amendment. By this sub-clause the amendment is to apply to assessments of tax in respect of income of 1977-78 and subsequent years, other than assessments made before 28 September 1978.
Sub-clause (3) is designed to make it clear that the amendment proposed by sub-section (1) is being enacted for the avoidance of doubt and, in particular, is not to be taken as implying that the present law permits a deduction on a basis different from that available under the law as proposed to be amended by sub-clause (1) of this clause.