CATCHWORDS Appeal and cross appeals - nature of liability to make payments in respect of annual and long service leave — whether taxpayer entitled to benefit of deductions for anticipated future payments. Whether such payments losses and outgoings incurred in gaining or producing assessable income - discrepancy between s.51(1) test and standard accountancy practice - employer not liable under award to pay on account of annual and long service leave otherwise than when period of leave taken. s.51(1) Income Tax Assessment Act, 1936 - Metal Industry Award 1971 - Metal Trades (Long Service Leave) Award, 1964. ; ON APPEAL from the Supreme Court of Victoria BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant NILSEN PORCELAINS (AUSTRALIA) PTY. LIMITED NILSEN'S BROADCASTING SERVICE PTY. LIMITED NILSEN DEVELOPMENT LABORATORIES PLY. LIMITED Respondents AND BETWEEN: NILSEN'S BROADCASTING SERVICE PTY. LIMITED NILSEN PORCELAINS (AUSTRALIA) PTY. LIMITED NILSEN DEVELOPMENT LABORATORIES PTY. LIMITED Appellants AND : COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALTA Respondent Nos. VG 37, 38, 39, 40, 41 and 42 of 1978. Coram: Brennan, Deane and Fisher JJ. Sydney 8 October, 1979. IN THE FEDERAL COURT OF AUSTRALIA } VICTORIA DISTRICT REGISTRY } 1978 No. VG 37 GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND : NILSEN PORCELAINS PTY. LIMITED Respondent ORDER JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney. THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of the Supreme Court of Victoria be set aside and in lieu thereof it be ordered that the appeal by Nilsen Porcelains (Australia) Pty. Lamited to that Court be dismissed and that the Commissioner's costs of and incidental to the appeal including any reserved costs be taxed and when taxed paid by Nilsen Porcelains (Australia) Pty. Limited to the Commissioner. 3. The respondent pay the appellant's costs of this appeal. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY 1978 No. VG 38 GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND : NILSEN'S BROADCASTING SERVICE PTY. LIMITED Respondent ORDER JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of the Supreme Court of Victoria be set aside and in lieu thereof it be ordered that the appeal by Nilsen's- Broadcasting Service Pty. Limited to that Court be dismissed and that the Commissioner's costs of and incidental to the appeal including any reserved costs be taxed and when taxed paid by Nilsen's Broadcasting Service Pty. Limited to the Commissioner. 3. The respondent pay the appellant's costs of this appeal. IN THE FEDERAL COURT OF AUSTRALTA } VICTORIA DISTRICT REGISTRY 1978 No. VG 39 GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND : NILSEN DEVELOPMENT LABORATORIES PTY. LIMITED Respondent ORDER. JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of the Supreme Court of Victoria be set aside and in lieu thereof it be ordered that the appeal by Nilsen Development Laboratories Pty. Lamited to that Court be dismissed and that the Commissioner's costs of and incidental to the appeal including any reserved costs be taxed and when taxed paid by Nilsen Development Laboratories Pty. Limited to the Commissioner. 3. The respondent pay the appellant's costs of this appeal. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY 1978 No. VG 40 wesw GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: NILSEN'S BROADCASTING SERVICE PTY. LIMITED Appellant AND : COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent ORDER JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of this appeal. —-- 4 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY 1978 No. VG 41 GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: NILSEN PORCELAINS AUSTRALIA) PTY, LIMITED Appellant AND : COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent ORDER JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of this appeal. IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ~v 1978 No. VG 42 GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: NILSEN DEVELOPMENT LABORATORIES PTY. LIMITED Appellant d COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent ORDER JUDGES MAKING ORDER: Brennan, Deane and Fisher JJ. DATE OF ORDER: 8 October, 1979 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of this appeal. IN THE FEDERAL COURT) OF AUSTRALIA 8 October 1979 BRENNAN J. ) ) Nos. VG37, 38, 39, 40, 41 and 42 of 1978 ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN AND BETWEEN AND CORAM THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant NILSEN PORCELAINS (AUSTRALIA) PTY.LTD. NILSEN'S BROADCASTING SERVICE PTY.LTD. NILSEN _ DEVELOPMENT LABORATORIES PTY.LTD. Respondents - and - NILSEN'S BROADCASTING SERVICE PTry.LTpD. NILSEN PORCELAINS (AUSTRALIA) Pry.LTD. NILSEN DEVELOPMENT LABORATORIES PTY.LTD. Appellants THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Brennan, Deane and Fisher JJ. Notices of assessments to income tax were issued to each of Nilsen Porcelains Service Pty.Ltd. (Australia)Pty.Ltd.,Nilsen's Broadcasting and Nilsen Development Laboratories Pty.Ltd. for the income year ended 30 June 1974, disallowing certain deductions which the taxpayers had claimed by reason of their respective employees' entitlements or prospective entitlements to long service leave and to annual holidays. The taxpayers objected and appealed to the Supreme Court of Victoria against the disallowance of their objections. Murphy J., allowing the taxpayers' appeals in part, made orders reducing each of the assessments by an amount which was, however, less than the deductions claimed. Three categories of deductions were in issue, the question in each case being whether the deduction was allowable under s.51(1) of the Income Tax Assessment Act 1936. His Honour held, as to the first category, that so much of the taxpayers' liability for long service leave existing at 30 June 1974 "as had accrued due" during the income year to employees who were entitled to that leave was deductible, but that such liability as had accrued due in previous income years was not deductible. As to the second category, his Honour held that "the sums representing the amounts which accrued due by way of annual leave to employees who had been continuously employed for over twelve months at the 30th June 1974" were deductible, except to the extent that a particular sum "includes a sum which had already accrued due at 30th June 1973." As to the third category, his Honour held that a sum claimed "in respect to employees of the taxpayer who had not, at the 30th June 1974, served continuously for twelve months" was not deductible. As his Honour held that each of the taxpayers should be allowed part of the deductions claimed by it, he ordered that the assessments in each case be reduced. The appellant appeals against each of his Honour's orders, submitting that none of the deductions in issue should have been allowed. Each of the taxpayers cross appeals against the order made in 1ts case, submitting that the deduction claimed by it should have been allowed in full. The appeal and cross appeal in the case of Nilsen Development Laboratories Pty.Ltd. (which I shall call the respondent) were treated in argument as raising the issues requiring the judgment of this Court in the cases Of each of the taxpayers. The Metal Trades (Long Service Leave) Award, 1964, and the Metal Industries Award covered the relevant employees of the respondent: those who were entitled to long service leave at the Material times; those who were entitled to annual holidays and who had been employed for more than 12 months at 30 June 1974; and those who had not then been employed for more than 12 months but whose holiday pay entitlement at 30 June 1974 was the sum calculated and claimed as a deduction. None of the amounts claimed as deductions was paid out during the income year, but the respondent submits that they were nevertheless "outgoings incurred" for the purposes of s.51(1). The phrase comprehends more than expenditure made and includes "a (1944) 71 C.L.R. 596 per Latham C.J. at p.606). Dixon J. in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 C.L.R. 179 at p.207 said that "incurred" - "does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected. " Whether a particular deduction is an "outgoing incurred" depends upon the nature of the liability which gives rise to the deduction and the respondent's obligation to discharge that liability as at 30 June 1974. It is convenient first to consider the liability in respect of long service leave arising under the Metal Trades (Long Service Leave) Award, 1964. Clause 6 of the Award defines the amount of leave to which an employee is entitled after service with an employer. 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 (c1.6(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 . (121i) 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 (c1l.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 1f 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 1t 1s applicable (c1.7(2)). At the end of the income year, two of the relevant employees of the respondent were entitled to be granted long service leave or to agree with the employer when the leave to which they were respectively entitled should be taken (cl. 8(1)). The entitlement of those employees to long service leave was indefeasible, for each had credit for more than 15 years' continuous service. In fact some of that service was with another company, but service with that other company was deemed to be service with the respondent, pursuant to cl1.5(5) of the Award. Clause 5(5) provides for deemed continuity of service where an employer transmits to another employer the business in which an employee is employed. 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. 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 (c1.8(2)(b)). Though 1t 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. In these circumstances, it was proper for the respondent to make provision in its 1974 accounts for a liability which was both foreseeable and inevitable. It did so by raising a provision for the payment of long service leave, calculated by reference to the respective employees' entitlements to leave (based on their respective years of service), and to the rate of wage then currently prescribed. The sum provided was the amount which, if leave had been taken on 30 June 1974, would then have become payable. A similar calculation had been made in order to make provision for long service in the respondent's 1973 accounts, but the factors in the 1973 calculation would have been a shorter period of service and, it may be assumed, a lower weekly rate of wages than in 1974. Amounts paid in respect of long service leave actually taken in a year were taken into account in fixing the provision at the end of the year. His Honour upheld the respondent's claim for a deduction of the amount of the 1974 provision only to the extent to which that provision had increased during the income year - that is, the excess of the 1974 provision over the 1973 provision. The second and third kinds of deductions claimed relate to annual leave, which is provided for by cl.25 of the Metal Industry Award, 1971. 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: "An employee on weekly hiring who:- (1) 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 1s 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 1s made for determining the rate appropriate to particular classes of employees. The respondent's employees who had given more than 12 months' continuous service were indefeasibly entitled to annual leave at the conclusion of each twelve-monthly period or to payment in lieu of leave on termination of their employment. The respondent's employees who had given more than one week but less than 12 months' continuous service would not become entitled to annual leave until 12 months' continuous service had been given unless the respondent, pursuant to sub-cl.(i) allowed the employee "to take annual leave either wholly or partly in advance before the right thereto [had] accrued due". Nor would such an employee be entitled to a payment on termination of his employment except as provided for by sub-cl.(1)(1). At the end of the income year, none of these employees had an entitlement to be paid money. The respondent's pecuniary liability to any employee would not arise until the time specified in sub-cl.(j), that is, "before going on leave," or the time specified in sub-cl.(1), that is, when the employee "leaves the employment of the employer or his employment is terminated", whichever first occurred. The respondent made provision in its 1974 accounts in 10. respect of the payments which it would, in the ordinary course of business, expect to make for annual leave. It calculated what it would have to pay on the periods of service given to 30 June 1974 and the rates of pay then current. Except in the cases of the employees of less than 12 months' standing, his Honour applied the same principle in partially allowing the respondent's claim for a deduction for annual leave as he applied in partially allowing its claim for a deduction for long service leave. In respect of neither kind of deduction can it be said that the respondent was under a present pecuniary liability at 30 June 1974, None of the amounts provided by the respondent in its 1974 accounts represented a debitum_in praesenti, solvendum in futuro: there was no present pecuniary liability. This is not a case of an award which entitles the employer to defer payment of moneys due to a workman. That is not to deny, of course, the certainty that pecuniary liabilities would arise, but they did not arise during the income year. The present case is not one where a pecuniary liability is defeasible, or where a pecuniary liability 1s difficult to quantify, or where the cost of discharging a liability may fluctuate from time to time. We had the benefit of argument upon a number of authorities relating to cases of these kinds, but the present case is of a different kind, for no relevant pecuniary liability arose during the income year. I should add that, so far as this conclusion relates to long service leave, it does not il. depend upon cl.5(5) of the Award. Although an employer who has transmitted his business to another may, on one view of that sub-clause, avoid liability to make payments in respect of long service leave, and shift the liability to the transmittee of the business, the sub-clause does not enable the transmittor unilaterally to shed his award obligation to his employee. Unless the employee and the transmittee choose to enter into a relationship of employer and employee, the transmittor is liable (on any view of the sub-clause) on terminating his employee's service to grant the employee the long service leave to which he is entitled and to pay him accordingly. Whatever be the true construction of the sub-clause, however, there is no pecuniary liability imposed upon the transmittor prior to the termination of his relationship with his employee. As an employee's pecuniary entitlements under both awards, when they fell due, were quantified by reference to the period of his service, it is tempting to attribute the ultimate cost of defraying the IJliability rateably to the period of service. Indeed, an accountant seeking to ascertain the profit or loss of the income year would prepare his accounts on that footing. But, as the High Court pointed out in Federal Commissioner of Taxation v. James Flood Pty.Ltd. (1953) 88 C.L.R.492 at pp.506,507: "Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by s.51(1) but it cannot be substituted for the test." 12. Flood's case was concerned with an employer's claim for a deduction on account of its award obligation to give paid annual leave. Though the award provisions as to annual leave there under consideration were framed in terms similar to the terms of the Metal Industries Award, there are differences between the facts of the present case and the facts which the Court assumed to have been accepted in Flood's case. In Flood's case it was not shown that any employee whose employment was terminated on or after 30 June 1947 (the end of the relevant income year) would be indefeasibly entitled to payment in lieu of annual leave, and, in the case of continuing employees, the deduction claimed represented part of the actual holiday pay that would evidently not become due until December 1947. And so one finds the Court rejecting the employer's claim for a deduction, characterizing the employer's liability at the end of the income year as inchoate, 1n process of accrual, and subject to contingencies (at p.508). The differences between Flood's case and the present case led his Honour to distinguish it, and thus to open the path to allowing in part the deduction claimed. The Court said in Flood's case (at pp.507, 508): "Tt is one thing, however, to say that it is not necessary, for the purposes of s.51(1), that an actual disbursement should have taken place. It is another thing to say that in the present case the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the 13. ensuing accounting period by employees whose service had not as yet qualified them for annual leave. In respect of those employees there was no debitum_ in praesenti solvendum in futuro. 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. It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30th June 1947, become predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means that 1t is imposed in the form of a liability associated with the operations of the taxpayer for the ensuing year." Inherent in this passage are the notions that one must identify the pecuniary liability 1n respect of which a deduction is claimed and attribute it to an accounting period. The pecuniary liabilities here in issue, arising solely under Awards, do not come into existence until the fulfilment of the conditions and the occurrence of the events specified in the Awards. A particular liability to each employee arises, provided the employee has served for the requisite period, upon the occurrence of an event: on his going on leave, on his termination of employment, or (in the case of long service leave) on his death. Although the period of service antecedent to the relevant event both fulfils a condition upon which the pecuniary liability depends, and provides one of the factors for measuring the amount of that liability, the particular liability which falls to be discharged does not exist during that period of service. When a 14. the particular liability comes into existence, it can be attributed only to the accounting period then current or, where leave is taken in more than one accounting period, to those periods. To attribute a leave payment to other periods during which an employee was actually working may well be appropriate if one is attempting to assess the profits of an undertaking during those other periods, and s. 51(1) allows a deduction in a given accounting period for an outgoing incurred un that period although the outgoing was incurred in gaining the assessable income of another period (A.G.C. (Advances)Ltd. v. Federal Commissioner of Taxation (1975) 132 C.L.R. at pp.185,197). Accordingly, the period within which an outgoing is incurred is not necessarily the period within which related assessable income is gained, and an outgoing incurred in one period is not to be attributed to another period, merely because a provision for it is properly included in the profit and loss account of the latter period. The particular pecunuary liabilities to the several employees of the respondent which would ultimately fall due were not incurred during the income year, and, in my opinion, there is no ground upon which Flood's case may be distinguished from the present. I would therefore allow the appellant's appeal, and dismiss the cross appeals. The orders of the Supreme Court should be set aside, and in lieu thereof the taxpayers' appeals to the Supreme Court should be dismissed with costs to be taxed. The appellant should have the costs of this appeal and of the cross appeais. a IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION were 1978 Nos. VG 37, 38, 39 40, 41 and 42 ON APPEAL FROM THE SUPREME COURT OF VICTORIA CORAM: Brennan, % Ocho BETWEEN ; COMMISSIONER OF TAXATION BETWEEN: OF THE COMMONWEALTH OF AUSTRALIA Appellant NILSEN PORCELAINS (AUSTRALIA) PTY. LTD. NILSEN'S BROADCASTING SERVICE PTY. LTD. NILSEN DEVELOPMENT LABORATORIES PTY. LTD. Respondents NILSEN'S BROADCASTING E Deane and Fisher JJ. 1979. SERVICE PTY. LTD. NILSEN PORCELAINS (AUSTRALIA) PTY. LTD. NILSEN DEVELOPMENT LABORATORIES PTY. LTD. Appellants THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent REASONS FOR JUDGMENT DEANE J: These are appeals by the Commissioner of Taxation ("the Commissioner") from decisions of the Supreme Court of Victoria (Murphy J.) upholding, in part, appeals by the three respondent taxpayers against their respective income tax assessments for the year of income ended 30 June, 1974 ("the tax year"). Each respondent taxpayer cross appeals against the decision of the Supreme Court in so far as its objection to its assessment was not sustained by that Court. In issue between the Commissioner and each taxpayer is the taxpayer's entitlement to the benefit of deductions in respect of so much of its anticipated future payments to employees in respect of annual leave and long service leave as would be related to service prior to the end of the tax year. In some cases, the relevant employee had served a full qualifying period for leave prior to the end of the tax year with the result that an entitlement to take leave had accrued. In other cases, a full qualifying period for leave had not been completed. It 1S common ground between the parties that any entitle- ment of the taxpayers to the disputed deductions falls to be determined by reference to the provisions of s.51(1) of the Income Tax Assessment Act, 1936 ("the Act"). The taxpayers will only be entitled to the claimed deductions if and to the extent that they constitute losses or outgoings of the tax year incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Plainly, the taxpayers are, at some stage, entitled to a deduction in respect of payments to employees in respect of periods during which employees are absent from work on annual leave or long service leave. The primary question involved in the appeals is whether, in the ordinary case where such leave is actually taken and payment made at the time it is taken, the employer is entitled to the benefit of the deduction only at the time when the leave is taken and the payment is made. If the employer may, in such a case, be entitled to a deduction at some point prior to the time at which the leave is taken and the payment is made, a question will arise as to the appropriate criterion for determining the time at which the entitlement to a deduction may arise and the extent of the deduction. If the matter fell to be determined by reference only to commercial and accountancy practice, it would be apparent that the Commissioner's appeals should be dismissed. It would be out of accord with accountancy practice and commer- cial reality to disregard, in the ascertainment of the profits of a business for a period, that part of the accruing and the accrued obligation to grant periods of leave to continuing employees and to make payments in lieu of leave to employees whose employment ceases, which can properly be related to service during the period in question. Both accountancy practice and commercial reality support the approach that an employer should treat a proportion of the amount which he will, apart from the contingency of a change of ownership of his business, be ultimately required to pay employees in respect of annual leave and long service leave as an additional cost of the period of service of the employees by reference to which the entitle- ment to leave is derived. The concept of annual leave and long service leave underlying this accountancy and commercial approach is, to adapt words used in Federal Commissioner of Taxation v. James Flood Pty. Limited ((1953) 88 C.L.R. 492 at p. 504), that , such leave is a period of leisure to which the employee becomes progressively entitled de dte tn diem as he works and for which correspondingly the employer becomes progressively liable to pay as part of the cost of labour employed from day to day, actual payment only being deferred to the commencement of the period of leave or the sooner determination of the employment. When it becomes antecedently clear that, apart from the contingency of a change of ownership of the undertaking, an employer will be required to make future payments in respect of annual leave or long service leave without receiving any corresponding quid pro quo by way of services, prudent account- ' ancy practice requires that provision be made in the employer's accounts to cover the future obligation to make the payments. To the extent to which the employees' entitlement to such leave will be based upon services rendered during a particular accounting period, prudent accountancy practice requires that the relevant provisions be made before the ascertainment of the profit or loss of the period. While commercial and accountancy practice may be relevant in ascertaining the nature and incidence of a claimed deduction as a step towards determining whether it answers the test laid down by s.51(1) of the Act, it cannot be substituted for that test. The ascertainment of whether a claimed deduction satisfies the test laid down by s.51(1) 1s ultimately a matter of jurisprudence (see Federal Commissioner of Taxation v. James Flood Pty. Limited, supra, at pp. 506-507). There is probably no general area in which discrepancy between accountancy practice and the test postulated by s.51(1) 1s more likely than the area in which accountancy practice requires the raising of a provis- ion before the ascertainment of the profits of a period. Of its nature, the making of a provision seems more appropriate to a loss or outgoing which is impending, threatened or intended than to a loss or outgoing which has actually been run into, encountered or fallen upon and which will ordinarily be taken into account as a result of a payment being made, a liability being brought to account as distinct from provided for, or an amount being actually written off. The rights of an employee and the obligations of an employer in respect of annual and long service leave must be \ defined in the context of the relevant provisions of the applicable award or statute. There are, however, a number of common features of both annual leave and long service leave under such provisions which are found in the two awards (The Metal Industry Award 1971 and The Metal Trades (Long Service Leave) Award 1964) relevant in the present appeals. The primary entitlement of a continuing employee in respect of long service leave and annual leave 1s an entitlement, during a period of employment in respect of which he will be entitled to the payment of salary or wages (sometimes with a loading), to be excused from working or attending for work. The primary obligation of the employer 1s to excuse the employee from ' & work and from attendance at work while paying the employee's salary or wages, together with any loading, in respect of the period of leave. Unless the employment comes to an end, neither the entitlement can be satisfied nor the liability discharged by the acceptance or the making of a payment in lieu of leave. The leave itself must be taken. Herein lies the basis of the argument advanced on behalf of the Commissioner that an employer is not entitled, in the ordinary case, to claim a deduction pursuant to s.51(1) of the Act in respect of the liability to make payments on account of annual leave and long service leave otherwise than when the period of leave is taken and the relevant payments are made. On that argument, the fact that an employee will be excused from working or attending for work during the relevant period of leave does not alter the nature of the payment or the period to which it is primarily referable. The payment is a payment of salary or wages which, in the ordinary case, is referable to the time when the leave is taken and the payment made. It may, as has been mentioned, be antecedently quite certain, apart from the contingency of a change of ownership of the undertaking, that an employer will be required to make future payments for periods of leave calculated by reference to periods of service falling within the year of income. That consideration, according to the argument, shows no more than that part of the regular expenditure incurred in carrying on the relevant undertaking is the payment of wages to men taking annual leave or long service leave and that it 1s possible to calculate in advance with approximate accuracy the amount of such expen- diture which should be related to a period of service falling within the year of income. As a matter of legal analysis, so the argument proceeds, the relevant loss or outgoing 1s incurred when the occasion for the making of the payment arises, that is when the relevant period of leave commences or the employment of the relevant employee comes to an end. In the James Flood Case (supra), the taxpayer claimed to be entitled to a deduction under s.51(1) of the Act in respect of the amount of a provision for holiday pay which it would, in the future, be obliged to pay to employees by reference to service during the tax year. None of the relevant employees had, at the end of the tax period, completed a period of service necessary to entitle him to take leave at that time. The High Court held that the taxpayer was not entitled to the relevant deduction. The five Justices who comprised the Court (Dixon C.J., Webb, Fullagar, Kitto and Taylor JJ.) were at pains, in their joint judgment, to stress that the nature and incidence of the relevant liability depended upon the provisions of the particular award. In a critical part of their joint judgment, they referred to the fact that the employees, in that case, had not, by their service, qualified for a period of annual leave. Plainly, there are grounds for distinguishing the actual decision in James Flood's Case (supra) from the present appeals at least in so far as the present appeals may relate to the case of employees who, during the tax year, became actually entitled to take leave as a consequence of completing some qualifying period of service. On the other hand, 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 pay- ments 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 s.51(1) of the Act, their Honours accepted the jurisprudential analysis as the relevant one. That choice, and the consequences they saw as flowing from it, appear from the following extracts from the joint judgment (ibid at pp. 504- 505, and 508): " A most important feature of the award ts that Leave must be taken and that tt must be taken at a time whitch ex hypothest in this given ease falls out= side the year of income. The payment ts made to the employee tin respect of the pertod of leave and forms part of his ordinary wages. The award therefore elearly vegards the payment as something made in respect of the two weeks when leave ts actually taken. Prima facte tt prohibits the substitution of a money payment for the leave. The pritma-facie postition is qualtfied only in the case of an employee who tav- fully leaves his enployment or whose employment is terminated without his fault". " When the employees are considered not in- dividually but collectively it is easy to understand that the taxpayer should say that it was antecedently quite eertain, apart from the remote contingency of a change of ownership of the undertaking, that an expenditure on annual teave would be made in the ensuing financial year, and that an almost ftxed pro- portion would be ealeulated in respect of pertods of -10- ; service falling within the year of ineome. But to say this ts not enough. It shows no more than that part of the regular expenditure ineurred in carrying on the undertaking is the payment of wages to men taking their annual leave and that the amount may be computed in advance with approximate aceuracy because annual leave depends on twelve months' service". "It may be true, that regarding the labour employed as a whole, the aecrual of an amount of the order claimed had, by 30th June 1947, become predictable with certainty. But that ts not the test. If tt be regarded nevertheless as an evtdenttary consideration having some wetght then tt cannot be divorced from the further consideration that the source of the aceruing Liability, the award, imposes tt as an obligation to pay wages for a pertod of time in the future during which the employee must be given leave. That means that tt is tmposed in the form of a ltta- bility assoctated with the operations of the taxpayer for, the ensuing year. In short the deduction elaimed offs78 10s. 2d. does not represent an expenditure associated with the production of tneome before 30th ' June 1947 for whieh a liability had been completely ineurred before that date". (See also the rationalization of the decision (on a subsidiary point) in W. Neville & Co. Limited v. Federal Commissioner of Taxation (1938) 61 C.L.R. 179 which is found on p. 507 of the one ne Ro en vee ee + joint judgment). Their Honours' conclusion as to the approp- rilate analysis of an employer's liability to make payments a in respect of periods of annual leave led them to conclude that the relevant time for the deduction was, in the ordinary case, the time when leave was taken and the payment made. When their Honours came, in their judgment, to summarize the effect of their decision, they did not do so in terms which differentiated between the case where a qualifying period for annual leave had been completed and the case where it had not. "This conclusion", they wrote, "only means that pay for annual leave is deductible year by year as t¢ ts patd, not that the taxpayer has not the benefit of a deduction" (ibid at p. 508, italics added). -11- In Federal Commissioner of Taxation v. The Northern Timber & Hardware Co. Pty. Limited (1960) 103 C.L.R. 650, the High Court considered the entitlement of the taxpayer to a deduction, pursuant to the provisions of s.66 of the Act, in respect of a provision made in a year of income to meet pros-— pective liabilities to employees in respect of long service leave. In the course of a joint judgment rejecting the tax- payer's claim, the Court (Fullagar, Kitto and Menzies JJ.) referred to the decision in the James Flood Case (supra) as follows (12bid at p. 565): "In FEDERAL COMMISSIONER OF TAXATION v. JAMES FLOOD PY. LTD. itt 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.5l, the pay for annual Leave would be deductible year by year as it was patd, and there can be no doubt that in a stmilar 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 faet) the amount of a provitston made for such payments had been allowed as a deductton in accordance with the taz- payer's present claim". It is possible that in referring, in such general terms, to the effect of the James Flood Case (supra), their Honours over- looked the fact that pay for annual leave or long service leave may not be paid until a tax year after that in which the entitlement to the relevant period of long service leave or annual leave actually arose upon completion of the necessary qualifying period. It is, however, unlikely that this was so since, at an earlier stage in the judgment, specific reference had been made by their Honours to such a case (ibid at p. 655). een eee or -12- It 1S now more than twenty five years since the decision in the James Flood Case (supra) was delivered by the High Court. As has been mentioned the Court, in that case, stated in terms that the effect of the decision was that pay for annual leave is deductible year by year as it is paid. It 1s more than eighteen years since the decision was given in Federal Commissioner of Taxation v. The Northern Timber & Hardware Co. Pty. Limited. In that case, the High Court stated, again in terms, that pay for annual leave is deductible year by year as it is paid and that in a similar way pay for long service leave is deductible in the year in which it is paid. Between the decision in the James Flood Case (supra) and the hearing of the present appeals in the Supreme Court, the provisions of the Act had been amended on more than fifty occasions without any amendment aimed at qualifying the apparently general effect of what was said in the judgment in that case. Not surprisingly, it has, we were informed by counsel for the parties, become the established practice of the Commiss- 1oner to allow deductions in respect of pay for annual leave and for long service leave, in the ordinary case where the leave is taken, only in the year in which the leave is taken and the payments are made. A taxpayer is ordinarily no more entitled to select the period in respect of which entitlement to a deduct- ion arises than he is to select the period in which income is derived. To qualify, at this late stage, the generality of what was said in the James Flood Case (supra) by a narrow assessment of ratio deetdendi, would arguably involve the great body of employer taxpayers losing entitlement to the benefit =~13- of a deduction in respect of payments actually made to the extent to which it was now held that they had been properly deductible at some prior time. It is, in my view, undesirable that this Court should, in the absence of special circumstances, attempt to cut down the broad effect of a decision of the High Court of Australia by narrow analysis of the ratio deetdendt of the particular case. There are not, in my view, any special circumstances which support treating the James Flood Case (supra) and The Northern Timber & Hardware Co. Pty. Limited Case (supra) as being other than authority for the general proposition that, in the ordinary case, pay for annual leave and long service leave is deductible year by year as it is paid at the time the leave is taken or on the prior termination of the employment. It is true that, upon analysis, the statements of that broad proposition were obiter. They should however be treated as authoritative and followed by this Court. I should, perhaps, add that even if, contrary to my view, the decision in the James Flood Case (supra) is to be confined to the case where no entitlement to leave in respect of the relevant period of service has accrued due at the end of the tax year, it is not presently apparent to me that it follows that the taxpayers were entitled to all the deductions which the learned judge at first instance allowed them. His Honour drew a distinction between the case where the relevant employee had completed a qualifying period of service and the case where he had not, regardless of whether a relevant qualify- ing period of service was completed during the tax year. With -14- respect, it is not apparent to me, as presently advised, that that distinction constitutes, on any approach, a proper criterion for determining whether the circumstances are or are not within the actual decision in the James Flood Case (supra). When a qualifying period of service is completed, an entitlement to a £f1xed period of leave accrues. Until the completion of the next qualifying period or the prior termination of employment, no new present entitlement to take leave or to receive a payment will ordinarily accrue. An employee who has not taken a period of annual leave or long service leave which has fallen due is not, by reason of that fact, ordinarily entitled to the immediate enjoyment of the leave which can ultimately be related to, for example, the six months' following the completion of the qualifying period which constitutes the first six months of the next qualifying period. This aspect of the matter does not, however, on the view I take, arise for decision and, since it was not really canvassed in argument before us, I refrain from forming or expressing any firm view upon it. I would uphold the appeals by the Commissioner and dismiss the cross appeals by the taxpayers. I would order that the taxpayers pay the Commissioner's costs both in the Supreme Court and in this Court. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION Nos. VG 37, 38, 39, 40, 41 and 42 of 1978. ON APPEAL FROM HIS HONOUR MR. JUSTICE MURPHY A JUSTICE OF THE SUPREME COURT OF VICTORIA BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant - and - NILSEN PORCELAINS (AUSTRALIA) PTY. LTD. NILSEN'S BROADCASTING SERVICE PTY. LTD. NILSEN DEVELOPMENT LABORATORIES PTY. LTD. Respondents - and - BETWEEN: NILSEN'S BROADCASTING SERVICE PTY, LTD. NILSEN PORCELAINS (AUSTRALIA) PTY. LTD. NILSEN DEVELOPMENT LABORATORIES PTY. LTD. Appellants - and - THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Brennan Deane and Fisher JJ. 8 October 1979. REASONS FOR JUDGMENT FISHER J.: This matter comprises an appeal brought by the Commissioner of Taxation ("the Commissioner") against each of three decisions of the Supreme Court of Victoria. That court upheld the decisions on appeals by Nilsen Porcelains (Australia) Pty. Ltd. ("Porcelains"), an appeal by Nilsen's Broadcasting Service Pty. Ltd. ("Broadcasting") and an appeal by Nilsen 7 Development Laboratories Pty. Ltd. ("the taxpayer") respectively. In each instance that court allowed the objection of the ' particular objector against an income tax assessment issued against 1t in respect of the year of income ended 30 June 1974 ' ("the year of ancome"). The consequence of these decisions was that the deduction claimed by each objector was allowed in part, This matter before us also comprises a cross-appeal brought by each of them,Porcelains, Broadcasting and the taxpayer, against the same decisions to the extent that the deductions claimed by the particular objector were disallowed in part by the Supreme Court. As Porcelains, Broadcasting and the taxpayer have similar interests in their respective matters, other than as to particular figures, the hearing was conducted before the traal judge in respect only of the circumstances of the taxpayer. Likewise before us the argument was confined to the taxpayer on the basis that our decision would apply mutatis mutandis to both Porcelains and Broadcasting. The taxpayer in the year of income ending 30 June 1974 claimed as an allowable deduction under s.51 of the Income Tax Assessment Act 1936 ("the Act") the sum of $8,091. This sum was made up of two provisions, one 1n respect of the taxpayer's liability to its employees for long service leave and the other C7 in respect likewise of annual leave. As to long service leave the taxpayer provided for the liability on two separate bases. Certain of its employees had served the necessary qualifying period and in respect of these employees the taxpayer accepts that 1t had an "absolute" liability. It quantified the amount of this absolute liability at $6,359 and claimed to deduct this sum as a loss or outgoing incurred in circumstances which brought it within s.51 of the Act, The balance of its liability, namely in respect of those employees who had not served the qualifying period, was the subject merely of a provision, and was not brought to account in arriving at the taxable income as returned and ; thus is not covered by these appeals. The taxpayer sought also to deduct the full amount of what it called its accrued liability for annual leave, namely $1,732, without regard to any question of employees' qualification therefor. The Commissioner in his assessment rejected both claims and by his adjustment sheet reduced the loss which had been returned by the amount of "holiday pay provision $1,732" and "long service leave provision $6,359." The parties acknowledged that in his treatment of these claims for a deduction the Commissioner was acting 1n accordance with his long standing practice, namely to allow as deductions the expense of long service leave and annual leave only when the expense was in fact discharged or met. The taxpayer objected to the assessment and upon the Commissioner's disallowance of the objection appealed to the Supreme Court of Victoria. That court (Murphy J.) allowed the appeal but only reduced the amount of the taxable income of the taxpayer by the sum of $2,783. The actual figures are of no significance, having been the subject of agreement between the parties, but the amount thereof is the necessary consequence of the trial judge's decision in principle. In respect of the clazm to deduct the absolute liability for long service leave, the trial judge allowed it to the extent of the amount of the increase thereof incurred in the year of income ending 30 June 1974. The deduction claimed for liability for annual leave was reduced by the amount claimed in respect of those employees who were not entitled to leave at 30 June 1974. In other words the deduction claimed was allowed in respect only of those employees who had by their service qualified themselves for annual leave at that date. The Commissroner appeals to this court contending in essence that the Supreme Court should not have allowed any deduction at all under these heads. The taxpayer cross-appeals contending for its part that the full amount of the claimed deduct2zons under each head should have been allowed. The trial judge gave his decision in a carefully reasoned judgment which I find quite acceptable and would not disturb either on the appeal or the cross-appeal. In the circumstances therefore I will, after briefly reciting the relevant facts which were not in dispute, confine myself to considering the submissions of counsel seeking to uphold the appeal on the one hand and the cross-appeal on the other hand, The taxpayer was incorporated in 1968 and immediately thereafter took over from its parent company, Oliver J. Nilsen & Co Pty. Ltd., so much of that Company's business as involved research anto and development of electrical engineering processes. At that time most of those persons who were in the year of income employees of the taxpayer were in the employ of Oliver J. Niisen & Co Pty. Ltd. These persons terminated their employment wath the latter company and were forthwith re-employed by the taxpayer. It 1s pertinent to note that in the relevant awards such a change of ownership of a business is described as a "transmission" of the business from a "transmittor" to a "transmittee." In respect of the claim to deduct its liability for long service leave the taxpayer's evidence centred upon two employees, Messrs Aughton and Auty, who had commenced employment with Oliver Jd. Nilsen & Co Pty. Ltd., in February 1942 and December 1938 respectively. They each served continuously with that company until the transmission of portion of its business in 1968 to the taxpayer. Each then terminated his employment with the former company and was thereupon employed by the taxpayer. Each of them was in the employment of the taxpayer both on 30 June 1973 and 30 June 1974 and had served continuously firstly with the parent company and subsequently with the taxpayer since 1942 and 1938 respectively. Both had taken some long service leave during their employment but all the evidence discloses is that on 30 June 1974 they were respectively entitled to about nineteen and seventeen weeks long service leave. At 30 June 1974, the end of the year of income, each had during the year received an increase of pay, neither had taken an that year any long service leave, and thus the taxpayer's liability to each in respect of long service had increased both in consequence of the increase in pay and the further year's service. As to annual leave the taxpayer's claim to an allowable deduction was in respect of employees who fell into two categories, those who had been 1n its employment for over twelve months Since taking annual leave, and those who had served for less than twelve months since taking leave. The trial judge and counsel before us considered separately the taxpayer's claim in repect of liability for long service leave and annual leave and I will do likewise. In each instance however the applicability or otherwise of the decision in Federal Commissioner of Taxation v James Flood Pty. Ltd. (1953- 1954) 88 C.L.R. 492 was an important element in the arguments of both counsel. As to the claim for long service leave, submissions were made under two heads; was any deduction under s.5l1 available to the taxpayer prior to discharging its liability and if so, how much was deductible in the year of income? The trial judge held an answer to the first question that the liability was an accrued obligation, not merely an inchoate liability in process of accrual, which obligation had been completely incurred by the taxpayer before the end of the year of income. It followed that in his opinion the obligation which accrued annually from 1968 onwards in respect of each of the employees, Aughton and Auty, for amounts by way of payment for long service leave to which each had become entitled was a loss or outgoing incurred, and necessarily incurred, within the meaning of s.51l(1) of the Act. As to the amount which was deductible under that section in respect of the year of income the trial judge held that the taxpayer was not entitled to deduct so much of its existing liability as had accrued in and was in law claimable as a deduction in preceding years. Its entitlement to a deduction was limited to so much of the liability as accrued during the year of income. He explained that this would include any increment in the entatlement of each employee consequent upon the fact that each had served another year and the fact that in respect of each there had been an increase in the current rate of pay above the rate applicable at the end of the previous year of income. It 1s in respect of this reduction in the amount claimed by the taxpayer in its return that the taxpayer cross-appeals. I will deal in the first instance with the Commissioner's contention that no amount should in the circumstances have been allowed an respect of long service leave by way of deduction under s.51 (1). His starting point was that the true nature and uneidence of the liability of the taxpayer in respect of long service leave for the two employees arose upon an examination of the terms of the particular award, and that, properly understood, such liability was substantially on all fours with the liability considered by the Il:gh Court in the James Flood case, supra. The application of that decision he contended concluded the matter against the taxpayer. The Commissioner's submission that the starting point was an examination of the terms of the particular award was not 1n issue between the parties, and in fact 1s in accord with the decision of the Court (Dixon C.J. Webb, Fullagar, Kitto and Taylor JJ.) in the James Flood case, supra at p.504; "However serviceable generalized conceptions may be in relieving overburdened assessors and tax accountants of the need of examining particular situations, all a court can decide is the case before it. And as the nature and incidence of the liability in the case before us obviously depends on the provisions of the award, it 1s that instrument we should consider and not the validity of some independent general proposition." It was agreed before us that for virtually all relevant purposes the liability of the taxpayer to provide long service leave is to be found in the Metal Trades Long Service Leave Award 1964 ("Long Service Leave Award") and that reference need only be made to Victorian legislation when 1t is expressly incorporated in the award (see for example clause 6(4) of the Long Service Award). All relevant clauses of the Award are set out by the trial judge in his reasons, and need not here be repeated. JI will only refer to those expressly relied upon by the Commissioner. In the James Flood case supra, which concerned the deduct-— ibility of a liability to employees for their holiday pay, the court held that the taxpayer company had not completely incurred a liability therefor at the end of the year of income. "There was not an accrued obligation, whether absolute or defeasible. There was at best an anchoate liability in process of accrual but subject to a variety of contingencies." James Flood case, supra at p.507-508. Such a conclusion, the Commissioner here contended, could and should properly (upon the true construction of the award) be reached in respect of the two employees' entitlement in the present case. This was, he said, the necessary consequence of the fact that at 30 June 1974 it was not possible to identify with certainty the amount payable to any particular employee or who would be making the payment. On the submzssion of the impossibility of identifying the amount payable, reliance. was placed by the Commissioner upon the fact that the amount could not be quantified until the particular employee took his leave. Payment to him would then be calculated at the current rate of wage then prescribed. Clause 7 of the Long Service Leave Award provides for this entitlement and is as follows: "> (1) Subject to the provisions of sub-clause (2) hereof, the rate of payment to which an employee on leave shall be entitled shall be in the case of a full-time weekly time worker the rate of wage then currently prescribed for the standard weekly hours by the Metal Trades Award of this Commission for the area in which he was employed and for the classification in which he was classified by the employer immediately prior to his commencing leave; such rate shall not include shift premiums, overtime, penalty rates, commissions, bonuses or allowances payable to him when working. (2) Payment shall be made in one of the following ways ~ (a) an advance for the whole of the period when the employee commences the period of leave, at the rate calculated in accordance with sub-clause (1) hereof; or {b} at the same time as payment would have been made if the employee had remained on duty, 1n which case payment shall, if the employee in writing so requires be made by cheque posted to an address specified by him; or (c) in any other way agreed between the employer and the employee. Provided that if during the period of leave any change in the rate of pay applicable to the employee has been effected by varlation of the Metal Trades Award of this Commission the rate of payment to which an employee on leave shall be entitled shall be, as from the date upon which such change 1S operative, such changed rate and if payment has been made in advance to any employee in respect of long-service leave the employer shall, upon the employee's return to duty, adjust such advance payment to accord with such changed rate of pay, to the extent to which the changed rate 1s applicable." Relying on this clause the Commissioner contended that the liability was not incurred until it was possible to calculate exactly how much was payable to the employee for his period of leave. Prior to that time it was contended the liability had 10. not been incurred, and the taxpayer had not been "definitively committed" thereto. Inherent in this submzssion was the fact that because of fluctuations in wage rate and the possibility of promotion or demotion, the ultimate llabality of the taxpayer might and probably would either increase or decrease from the liability calculated at 30 June 1974. The concept of a "definitive conmitment" as an essential feature of a loss or outgoing deductible under s.51(1) was established by the James Flood case, supra at p.506: "The word "outgoing" might suggest that there must be an actual dasbursement. But partly because such an interpre- tation would produce very strange and anomalous results, and partly because of the use of the word "incurred" the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of ancome although there has been no actual disbursement." There was before us some speculation as to the significance to attach in the circumstances to the adverb "definitively." In my opinion it is the converse of an "open-ended" commitment or a commitment which 18 at large to the extent that it 1s not delimited or defined by the circumstances which raise the obligation. The word has been used in connection with both a sentence for an offence, and the publication of a scheme, and in each instance there is to be found a reference back to the legislation, which "defined" the manner and form of publication or the range of sentence permissible, as the case may be: cf Esnouf v A.G. for Jersey (1882). 8 App. Cas. 304, In re Diptford Parish Lands j1934]Ch 151 and In xe The Hackney Charities (1864) 34 L.J. Ch 169. In the present matter it 15 in my opinion the provisions of the award which defined the obligation and the extent of the commitment thereunder of the taxpayer. It 1s only the outgoing —-—-- - 11. to the extent that the taxpayer 1S committed thereto at any particular time by the provisions of the award that 1s a definitive commitment of the taxpayer. In my opinion the Commissioner's challenge on this aspect of the matter 1s unacceptable, and I agree in its entirety with the reasoning of the trial judge. Not only is there ample authority that an estimate of the amount of a liability is sufficient to enable a deduction to be obtained (See R.A.C.V. Insurance Pty. Ltd. v Federal Commissioner of Taxation 74 A.T.C. 4169 and Commercial Union Assurance Company of Australia Limited v Federal Commissioner of Taxation 77 A.T.C. 4186), (and without doubt the calculation of the extent of the liability in this anstance goes well beyond an "estimate" of the amount thereof), but the exact manner of calculation of the liability is pre- determined i.e. "rate of wage then currently prescribed for the standard weekly hours" etc: Clause 7 (1) of the Long Service Leave Award. The Commissioner contends that it 1s only when the employee takes his leave that his exact entitlement can be calculated, because 1t 1s determined by the then ruling rate. However this submission 1S not in accordance with the terms of the award, for the employee 1s pursuant to the proviso to clause 7 (2) entitled, if rates of pay increase and he has been paid for the period of his leave prior to taking the same, to have that payment adjusted on his return to duty. In my opinion there 1s nothing in the James Flood case, supra which supports the Commissioner's argument on this aspect of the matter and I endorse, without repeating, the trial judge's comments thereon. 12. The next argument was again based upon a principle formulated in the James Flood case supra al p.506, namely that the taxpayer must have "completely subjected" itself to the liability and there was no such complete subjection here because there was no certainty that the taxpayer would be the employer at the time the employee took his long service leave. Such a contention has its genesis in the fact that there always 1s the possibility of the disposal by the taxpayer of its business and the consequent application of the provisions of clause 5 (5) of the Long Service Leave Award. This sub-clause is as follows: "Transmission of Business 5 (a) Where a business 1s, whether before or after the llth May 1964, transmitted from an employer (in this sub- clause "the transmittor") to another employer (in this sub-clause called "the transmittee") and an employee who at the time of such transmissicn was an employee of the transmittor 1n that business becomes an employee of the transmittee - (i) the continuity of the service of the employee shail be deemed not to have been broken by reason of such transmission; (12) the per1od of service which the employee has had with the transmittor or any prior transmittor shall be deemed to be service of the employee with the transmzittee. (b) In this sub-clause "business" includes trade process business or occupation and includes part of any such business, and "transmission" includes transfer conveyance assignment or succession whether by agree- ment or by operation of lav, and "transmitted" has a corresponding meaning." As I read these provisions, they contemplate that & the time of the disposal of the business the employee has the option of following the business and becoming an employee of the transmittee in which case the continuity of his service for the purpose of determining the amount of long service leave to which he is entitled 1s deemed not to have been broken. In truth of course it has been broken, and he has entered into employment with a 13. new employer, but for the purpose of calculating the number of years of his continuous service, 1t 1s deemed that there has not ' been a break. His service with the new employer (the transmittee) , is deemed to be 4 continuance of his service with the old employer (the transmittor). Alternatively the employee has the option of declining to accept employment with the transmittee and acknowledging that his service with his employer (the transmittor) has been terminated. In these circumstances the employee 1s entitled pursuant to clause 6 (2) to his long service leave or a pro rata proportion thereof and under clause 8 (2) to receive payment in respect thereof, If the employee elects to exercise the latter option the transmittee employer 1s relieved from his liability to accept the obligation of long service leave, but in this anstance payment is to be made by the transmittor employer to the employee in lieu of granting leave. ' As to the former option, the transmittee if he employs all or any of the employees of the transmittor subjects himself (in consequence of clause 5 (2) of the Long Service Leave Award) to the then existing obligation to provide long service leave to these employees. It is a liability which he 1s obliged to accept upon taking over the business and any of its employees, and his acceptance of the liability almost certainly relieves the transmittor therefrom. It 1s certainly a liability which the transmittee would prudently take into account in his decision to acquire the business, and e1ther adjust the purchase price "oe 14. accordingly or require a specific payment by the transmittor as consideration for the acceptance of the liability to the employees taken over. In these circumstances it seems to me that the taxpayer had a continuing obligation, regardless of whether or not it ultimately 1s in fact called upon to grant leave and make payment therefor. It can not be said that the obligation was defeasible Ve (and even if it was 1t 1s not fatal to the taxpayer, see the James Flood case, supra at p.507) but that in certain circumstances, namely death of the employee, termination of employment of the employee for certain specified causes, or termination on trans-~ mission of the business the employer discharges his obligation otherwise than by granting leave with pay. In my opinion the taxpayer completely subjected itself to the lzabilaty when it took over the employment of Messrs Aughton and Auty on transmission of t the business. | In this instance also I do not see the Commissioner as successfully challenging the trial judge's decision. Another issue for consideration is whether the decision in the James Flood case, supra, has application to the facts in the present matter. It 1S my opinion that it has no direct application and can be distinguished therefrom on the grounds relied upon by the trial judge. The question for determination in that case was the deduct-— ibility under s.51(1) of an amount representing a provision for annual leave the liability for which it was contended had accrued in respect of a period in the year of income. The year of income was the year ended 30 June 1947, and it was contemplated that the ' 15. employees would commence their leave in December 1947. What the company claimed to deduct, as the court viewed the matter (James Flood case, supra at p.503), was an amount representing 1ts calculation of that part of the annual leave entitlement of its employees, which had accrued between 1 January and 30 June 1947. The crucial fact which distinguishes that case from the present matter was that at 30 June 1947 the employees had not by their service qualified themselves for any annual leave. By the terms of the relevant award an employee was only entitled to annual leave after twelve months continuous service (less the period of annual leave) and the employees had not served for such a period at 30 June 1947. It 1s in these circumstances that the High Court stated the ratio of ats decision at pp.507-508. "It 12s one thing, however, to say that it 1S not necessary, for the purposes of s.51(1), that an actual disbursement should have taken place. It 1S another thing to say that in the present case the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the ensuing accounting period by employees whose service had not as yet qualified them for annual leave. In respect of those employees . there was no debitum in praesentli solvendum in futuro. There was not an accrued obligation, whether absolute or defeasible. There was at best an 1znchoate liability in process of accrual but subject to a variety of contingencies. It may be true, that regarding the labour employed as a whole, the accrual of an amount of the order claimed had, by 30 June 1947, become predictable with certainty. But that is not the test. If it be regarded nevertheless as an evidentiary consideration having some weight then it cannot be divorced from the further consideration that the source of the accruing liability, the award, imposes it as an obligation to pay wages for a period of time in the future during which the employee must be given leave. That means it 1s imposed an the form of a liability associated with the operations of the taxpayer for the ensuing year. In short the deduction claimed of £578.10825. does not represent an expenditure associated with the production of income before 30 June 1947 for which a liability had been completely incurred before that date." (my underlinings) It seems to me that the court has taken pains to emphasize that because the employees in that case had not qualified for any 16. annual leave at 30 June 1947 the liability at that date in respect of annual leave was an inchoate liability, which had not accrued but was an the process of accrual. For the same reason liability for annual leave had not been completely incurred by the company at that date. If the employees had at that date qualified by service to take annual leave in the next year, the liability would have been completely iuncurred at 30 June 1947. In which case 1t would have been a liability associated with the operations of the taxpayer for that year of income, and not, as the court stated to be the case, for the ensuing year. Here by contrast the position was that the two employees had at the end of the year of income qualified for long service leave by their service with the taxpayer. The liability for payment therefor was not an inchoate liability in the process of accruing. It was a liability completely incurred, the quantum of which in the ordinary course was increasing each year that the taking of the leave was postponed. In these circumstances the trial judge in my opinion correctly distinguished the James Flood decision, supra. With these considerations in mind it 1s perhaps appropriate to turn to the other matter appealed by the Commissioner, the allowance of a deduction in respect of annual leave and the cross appeal by the taxpayer in this respect. The taxpayer's claim to deduct annual leave expense related as I have said to two classes of employees, those who had worked 3 ' in ats employment for over twelve months and those who had not. 17. Again the crux of the matter is the proper interpretation of the Award, which is agreed to be the Metal Industry Award 1971. The trial judge has set out in his reasons the relevant provisions of the award and they need not here be repeated. The Comm2zssioner conceded that there was nothing in the award which would require it to be construed differently from the award under consideration in the James Flood case, supra. It follows that 1t 1s then a matter of applying the ratio of that decision to the facts of this matter. This has in my opinion been correctly done by the trial Judge differentiating between those who have served the qualifying period of twelve months and those who have not. In respect of the former class of employees the liability had been completely zuncurred at 30 June 1974 and the amount thereof was deductible. In respect of those who had not completed the qualifying period, the liability was inchoate and in the process of accruing. The trial judge correctly decided that 1n this regard the assessment should stand. Lastly, I turn to the taxpayer's challenge to the trial judge's fanding that in respect of the long service leave liability a deduction was only available in respect of the increment whach accrued in the year of income in consequence of wage increases and a further year's service. The taxpayer for its part submitted that the total outstanding amount of its lzabilaty for long service leave for qualified employees should be deductible in the year of income as being a loss or outgoing ancurred in that year. Its counsel conceded chat it is only losses or outgoings which are incurred in the 18. year of income which are deductible in that year. If the particular loss or outgoing was incurred in a previous year it was not deductible in a subsequent year. It is of course accepted that a loss or outgoing 1s not incurred only when the actual expenditure 1s made. It is incurred in the year in which the taxpayer is "definitively committed" to the expenditure, even though it 1s not discharged until a subsequent year: cf Emu Bay Railway Co. Ltd. v Federal Commissioner of Taxation (1945-46) 71 C.L.R. 596 at p.606 per Latham C.J. Moreover as Latham C.J. said in Texas Co (Australasia) Ltd. v Federal Commissioner of Taxation (1940) 63 C.L.R. 382 at p.427. ",,.the law does not insist that when a credit system of accounts has been adopted so that an expenditure is deducted when 1t 1s incurred (whether or not the liability which 1t represents has actually been discharged by payment) it 1s thereafter impossible to make a further deduction on the same account 1n a subsequent year when it turns out that a larger expenditure than that anticipated must actually be made in order to discharge the liability." The trial judge in the present case held that the taxpayer's liability in respect of the relevant employees' entitlements to long service leave had not, except to the extent of the increment arising out of the year of income, been incurred in that year but in previous years. In these circumstances he held, and in my opinion correctly, that this portion of the liability, not having been incurred in the year of income, could not be deducted in that year under s.5]1 (1) of the Act. The taxpayer submitted before us to the effect that the total liability for long service leave (and not merely the increment 1n the year of income) was iancurred in the year of 19. income because it was in that year, 1t was contended, that the taxpayer completely subjected itself for the first time to the liability. In years prior thereto,it was argued, the taxpayer had not subjected itself to the liability because it accepted the Commissioner's practice as allowing a deduction only when payments for long service leave were actually made. Therefore it had made no claim in those years for any deduction. It 1s my opinion that the taxpayer had subjected itself to this liability (other than the current year's ancrement)an the preceding years. In respect of these two employees it subjected itself completely to a liability at the time it employed them, on the acquisition of its business from their previous employer. In addition each year thereafter by retaining these men as employees in its business 1t subjected itself to liability for the annual increment. The taxpayer contended that 1t had only completely subjected itself to the liability in the year of income because this was the first year in which it made provision 1n its accounts for its total liability and claimed a deduction for the amount thereof. Even if such a circumstance could amount to a subjection to a liability, and I do not believe that 1t does, 1t 1s significant that this occurred for the first time in the year of income only in the accounts as adjusted for the purposes of its return of income for tax purposes. In its commercial accounts the profit had always been raised after charging each year the amount of the provision made in respect of that year to cover the company's liability for long service leave. 20. In my opinion the appeals of both the Commissioner and the taxpayer should be dismissed. \ certify that this and the /9 preceding pages are a true copy of the Reasons for Judgment of Mr. Justice Fish qs. jate Dated: % Gelb? (779, one