Merrill Lynch International (Australia) Ltd v Commissioner of Taxation [2001] FCA 1127

FEDERAL COURT OF AUSTRALIA

Merrill Lynch International (Australia) Ltd v Commissioner of Taxation [2001] FCA 1127

TAXATION– income tax – "loss or outgoing" "incurred" within subs 51(1) of Income Tax Assessment Act 1936 (Cth) – taxpayers paid bonuses to their employees shortly after end of year of income – terms of contracts of employment reserved to taxpayers a discretion whether to pay bonuses – commercial circumstances made it probable that bonuses would be paid – amounts of bonuses determined shortly after end of year of income – reserves set aside progressively throughout year of income for bonus pool – whether outgoing "incurred" within that year or after it – whether "incurring" of outgoing requires that legal liability to pay it must be incurred or whether sufficient that commercially certain that it will be paid CONTRACT – distinction between a contractual promise to pay a bonus and a contractual obligation of reasonableness, good faith and fair dealing in the exercise of a discretion whether to pay a bonus

WORDS AND PHRASES – "incurred"

Income Tax Assessment Act 1936 (Cth) s 51(1)

Vincent v Merrill Lynch Australia Pty Ltd [2000] NSWIRCom 160 discussed New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 followed Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 applied RACV Insurance Pty Ltd v Commissioner of Taxation [1975] VR 1 distinguished Commissioner of Taxation v Manufacturers' Mutual Insurance Ltd (1931) 31 SR (NSW) 575 distinguished Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 7 ATR 376 discussed Commercial Union Assurance Co of Australia Ltd v Federal Commissioner of Taxation (1977) 14 ALR 651 distinguished Gates v WA and RJ Jacobs Ltd [1920] 1 Ch 567 cited Body Corporate Strata Plan No 4303 v Albion Insurance Co Ltd [1982] VR 699 cited Antique House Pty Ltd v Security & General Insurance Co Ltd (1984) 3 ANZInsCas 60-556 cited Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 applied Federal Commissioner of Taxation v Nilsen Porcelains (Australia) Pty Ltd (1979) 41 FLR 36 cited Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 distinguished Commissioner of Inland Revenue v Lo & Lo (a firm) (Privy Council, 26 March 1984, unreported) distinguished Hooker Rex Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 181 discussed Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation (1990) 95 ALR 663 discussed Coles Myer Finance Ltd v Commissioner of Taxation (1993) 176 CLR 640discussed Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd [1996] 1 AC 315 cited Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 discussed Commissioner of Taxation v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1999) 87 FCR 536 discussed Australia and New Zealand Banking Group Ltd v Commissioner of Taxation (1994) 48 FCR 268 discussed Federal Commissioner of Taxation v Citibank Ltd (1993) 44 FCR 434 cited Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 cited Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 cited Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 cited Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187 cited