Nilsen Development Laboratories Pty. Ltd. & Ors. v. Federal Commissioner of Taxation.

Judges:
Barwick CJ
Gibbs J
Stephen J
Mason J
Murphy J
Aickin J
Wilson J

Court:
Full High Court

Judgment date: Judgment handed down 10 February 1981.

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Barwick C.J.

Appeals in these three matters were heard together: the essential facts and legal issues in each being sufficiently identical to warrant that course. The circumstances of one of them, namely, Nilsen Development Laboratories Pty. Ltd., have been taken as typical so that the result reached in that case will be followed in the others.

Some employees of the taxpayer had during or prior to the year of income in question become entitled to long service leave and some employees had during that year become entitled to annual leave. But, though so entitled, no arrangements had been made for any such leave to be taken in the year of income. Consequently, none of those employees had in that year become entitled to be paid money either in respect of long service or in respect of annual leave. Their entitlement to be given leave in due course had become indefeasible, though the amount of the wages to be paid to them whilst on leave of either kind when the time came for it to be taken was not finally and unalterably fixed. Indeed, it is conceded that the taxpayer has not come under any obligation to pay any sum of money to any of those employees in respect of leave of either kind during the year of income, though it had in or by that time become certain that, in due course, the taxpayer would become liable to pay an amount of wages, i.e. when the employees entered upon the leave to which they were then indefeasibly entitled.

What the taxpayer in substance claims to deduct from its gross income is an amount allowed in its commercial accounts to represent an estimate of what it would be bound to pay the employees if they had been on leave during the year of income less any amount which had been allowed in such

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accounts in earlier years in relation to that item. This is spoken of in argument as representing an ``accrued liability'', not in the sense of a present liability but in the sense of liability which is now certain to arise in the future, i.e. as a money sum in the least amount which would inevitably have to be paid in the future.

Having formed a view which I am about to express as to the result of these appeals, it is unnecessary for me to discuss the manner in which the taxpayer calculated the sum which it claimed to deduct as representing what it described as its ``accrued liability'' in respect of long service and annual leave.

Clause C of the Metal Trades (Long Service Leave) Award, 1964, provides for the grant of long service leave after 15 years actual or deemed service as an employee. Deemed service is service with an employer whose business had been ``transmitted'' to the actual employer. I take the following from the reasons for judgment of Brennan J. of the Federal Court, having satisfied myself from perusal of the relevant award that it accurately reflects its relevant provisions:

``After 15 years' service an employee is entitled to 13 weeks' long service leave and he accumulates a proportionate additional entitlement after 15 years' service (cl. 6(1)). If the employee's service terminates after 10 years but before 15 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 clause 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)).''

His Honour sums up the relevant evidence as follows:

``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.''

I agree with his Honour when he says:

``A pecuniary liability could not arise before the time when an employee went on leave (cl. 7), or his employment was terminated (cl. 8(2)(a)) or he died (cl. 8(2)(b)). Though it was clear that a 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.''

I take the following from the reasons of Brennan J. as accurately describing the entitlement to annual leave:

``An employee on weekly hiring must be allowed 21 consecutive days' leave annually after 12 months' continuous service (less the period of annual leave) (sub-cl. (a)). Sub-clause (1) provides:

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• `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' continuous 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.

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 (sub-cl. (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.''

By majority the Federal Court ( Brennan and Deane JJ., Fisher J. dissenting) held that the amount provided in the commercial accounts of the taxpayer as a provision against its future liability to pay money in respect of long service and annual leave for which its employees had already qualified was not a loss or outgoing within the meaning and operation of sec. 51(1) of the Income Tax Assessment Act 1936 as amended.

Much discussion took place in the argument of these appeals and indeed in the judgment of both courts below as to the rationale and applicability of this Court's decision in
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492 ( Flood's case ). Whilst this case may be said to afford useful guidance in the general area with which this case is presently concerned, I would not think that either the conclusions of that case or the reasons expressed therefore necessarily dispose of the problem now presented. Indeed, I would be disclined myself to take too much from the Court's decision in Flood's case . It is, of course, quite possible to treat members of the Court as saying that, without payment of the appropriate amount of wages in respect of leave, whether long service or annual, in the course of actually being taken, no sum should be regarded as deductible under sec. 51(1). But, in my opinion, there were so many other factors upon which the Court's precise decision in that case seem, according to their reasons, to have been placed that I would think it better not to regard the case as authority of a kind which could be said to resolve the question arising in the present case. In particular, I do word ``accrual'' in the reasons for judgment in that case was so accurate that its use could be translated into the present circumstances. To my mind, the Court in truth in that case could have reached its conclusion directly on the ground that, in the case of award provisions such as were thus in question, only actual payment for leave being taken could support a claim for deduction under sec. 51(1). But I do not read the Court's reasons as saying that, or at any rate as saying it unequivocally. I would prefer myself therefore to treat the questions arising in the present case as not covered by authority, however much I might think that the reasons in Flood's case tend towards the support of a conclusion which I would otherwise form.

In my opinion, the language of Dixon J. in
New Zealand Flax Investments Ltd. v. F.C. of T. (1938) 61 C.L.R. 179 at p. 20 needs to be carefully perused and applied. Granted that exhaustive definition of what may be

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denoted by the word ``incurred'' in sec. 51(1) may not be possible, there can be no warrant for treating a liability which has not ``come home'' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham's language in
Emu Bay Railway Co. Ltd. v. F.C. of T. (1944) 71 C.L.R. 596 at p. 606 clearly enough indicates that to satisfy the word ``incurred'' in sec. 51(1) the liability must be ``presently incurred and due though not yet discharged''. The ``liability'' of which Sir John speaks is of necessity a pecuniary liability and word ``presently'' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investment Ltd. v. F.C. of T. which presently needs emphasis is that the word ``incurred'' in sec. 51(1) ``does not include a loss or expenditure which is no more than pending, threatened or expected'': and I would for myself add ``no matter how certain it is in the year of income that that loss or expenditure will occur in the future''.

In my opinion, it is abundantly clear from the terms of the Metal Industry Award and those of the Metal Trades (Long Service Leave) Award that the primary obligation placed on the employer by their terms is to give the employee who has served the requisite amount of time leave away from the employment whilst maintaining its continuity. Assuming the employer's business continues and the employee remains alive, a pecuniary liability to the employee will undoubtedly arise when, but not before, the employee enters upon a period of leave, whether be it annual or long service. When the employee has served a period of employment which qualifies him for leave, whether it be annual or long service, it may thus confidently be said that sooner or later he must be given leave and that when he enters upon his leave a liability will then, and for the first time, arise for the employer to make a payment of money to him.

It was suggested in argument that a liability to make such a payment was accruing during the time the employee was serving the period qualifying him for leave. But, in my opinion, it is not a precise or proper use of language to so describe the circumstance that an employee is becoming progressively qualified by length of service to be able to require that he be given leave of one sort or another. In my opinion, no liability is ``accruing'' in a proper sense of the word during the time that the employee is serving his qualifying period nor has it accrued when he has served that qualifying period.

All that then can really be said is that it has become certain that, in due course when further events occur, that it is to say, the time for the taking of leave is fixed and the period of leave is entered upon, a liability to pay money will arise. It is quite wrong, in my opinion, in this connection to treat any liability as either accruing or having accrued at any time prior to the time when the employee enters upon the leave, whether it be annual or long service.

Of course, it may very well be that in the keeping of commercial accounts it would be proper to make provision against the annual gross profits of some sum related to the amount of the liability which must in due course arise because of the service by the employee during the year of accounting; and to do so before arriving at the profits or gains of the period during which the qualification of the employee is taking place. But the prudence and commercial propriety of such a course has little bearing on the question whether there is present in the year of income a loss or outgoing within the meaning of sec. 51(1).

These considerations, in my opinion, are the foundation for the view that no deduction under sec. 51(1) in respect of leave, whether annual or long service, of any amount can properly be claimed by an employer bound by an award or industrial agreement substantially in the terms of the awards presently under consideration, until the employee enters upon the appropriate leave. Then, and only then, and for the first time, there is an accrued liability to pay money and then, and only then, there is, in my opinion, an outgoing which is deductible under the provisions of sec. 51.

For these reasons, I would dismiss the taxpayers' appeals.

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