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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Mason J.

I agree that the taxpayers' appeals should be dismissed, generally for the reasons given by the Chief Justice.

Those reasons, so it seems to me, give expression to the principle on which
F.C. of T. v. James Flood Pty. Ltd (1953) 88 C.L.R. 492 , and
F.C. of T. v. Northern Timber and Hardware Company Pty. Ltd. (1960) 103 C.L.R. 650 were decided. Flood dealt with annual leave, Northern Timber with long service leave. As Deane J. said in the Federal Court:

``... at the heart of the joint judgment in the James Flood case (supra) 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 employment 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 sec. 51(1) of the Act, their Honours accepted the jurisprudential analysis as the relevant one.''

(79 ATC 4520 at p. 4527.)

In Flood the Court in its unanimous judgment observed (at pp. 504-505):

``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.''

These comments are equally true of the provisions in this case.

The Court went on to say (at pp. 507-508):

``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.... In short the deduction claimed... 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.''

The Court concluded (at p. 508):

``On this ground the taxpayer fails. This conclusion only means that pay for annual leave is deductible year by year as it is paid...''

The consequence is that an employer is not entitled to deduct as outgoings under sec. 51 amounts which he is liable to pay to employees by way of annual leave and long service leave pursuant to the two awards dealt with in this case unless liability to make the payments has accrued by reason of the employee taking the leave or the occurrence of events (e.g. death, termination of employment in certain circumstances) by reason of which the employer is bound to make the payments. Generally speaking, the result is that the employer is entitled to deduct the amount in the year in which the payment is made.

I agree with the Chief Justice's comment on the observation of Dixon J. in
New Zealand Flax Investments Ltd. v. F.C. of T. (1938) 61 C.L.R. 179 , at p. 207 . And I do not understand
R.A.C.V. Insurance Pty. Ltd. v. F.C. of T. 74 ATC 4169 , (1975) V.R. 1 , to have decided otherwise. There, Menhennitt J. held that the taxpayer, an insurance company, was entitled to deduct as a loss or outgoing under sec. 51 an amount reasonably estimated to be the total amount which it would have to pay in respect of its liability to indemnify insured drivers against claims by third parties incurred, but not reported, during the year of income. The estimate was made in respect of accidents occurring in that year which gave rise to liability under policies then in existence.
Commercial Union Assurance Co. of Australia Ltd. v. F.C. of T. 77 ATC 4186 , falls into the same category.

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ATC 4040

See also
Commonwealth Aluminium Corporation Ltd. v. F.C. of T. 77 ATC 4151 , where the taxpayer completely subjected itself to liability to pay royalties.