Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 (10 February 1981)

HIGH COURT OF AUSTRALIA

NILSEN DEVELOPMENT LABORATORIES PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION
[1981] HCA 6; (1981) 144 CLR 616

Income Tax (Cth)

High Court of Australia
Barwick C.J.(1), Gibbs(2), Stephen(3), Mason(4), Murphy(5) Aickin(6) and
Wilson(7) JJ.

CATCHWORDS

Income Tax (Cth) - Deductions - Outgoings - Long service leave - Annual leave - Employees indefeasibly entitled to leave - Leave not taken in year of income - Accounting provisions for "accrued" entitlements - Whether outgoings incurred in year of income - Income Tax Assessment Act 1936 (Cth), s. 51 (1).

HEARING

Melbourne, 1980, March 26, 27;
Canberra, 1981, February 10. 10:2:1981
APPEALS from the Federal Court of Australia.

DECISION

1981, February 10.
The following written judgments were delivered: -
BARWICK C.J. Appeals in these three matters were heard together: the 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. (at p620)

2. 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 had 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. (at p620)

3. 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 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. (at p620)

4. 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. (at p620)

5. Clause C of the Metal Trades (Long Service Leave) Award, 1964, provides for the grant of long service leave after fifteen years actual or deemed service as an employee. Deemed service is service with an employer whose business has been "transmitted" to the actual employer. I take the following from the reasons for judgment of Brennan J. of the Federal Court (1979) 41 FLR, at pp 38-39; 27 ALR, at p 242; 10 ATR, at p 257; 79 ATC, at pp 4521-4522. , having satisfied myself from perusal of the relevant award that it accurately reflects its relevant provisions:
"After fifteen years' service an employee is entitled to thirteen weeks long service leave and he accumulates a proportionate additional entitlement after fifteen years' service (cl. 6 (1)). If the employee's service terminates after ten years but before fifteen 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))." (at p621)

6. His Honour sums up the relevant evidence as follows (1979) 41 FLR, at p 39; 27 ALR, at p 242; 10 ATR, at p 258; 79 ATC, at p 4522. :
"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." (at p621)

7. 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." (at p622)

8. I take the following from the reasons of Brennan J. as accurately describing the entitlement to annual leave: (1979) 41 FLR, at p 40; 27 ALR, at pp 243-244; 10 ATR, at pp 258-259; 79 A.T.C., at pp. 4522-4523.
"An employee on weekly hiring must be allowed twenty-one consecutive days' leave annually after twelve months' continuous service (less the period of annual leave) (sub-cl.

(a)). Sub-clause (1) provides:
'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." (at p622)

9. 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 s. 51 (1) of the Income Tax Assessment Act 1936, as amended. (at p622)

10. Much discussion took place in the argument of these appeals and indeed in the judgments of both courts below as to the rationale and applicability of this Court's decision in Federal Commissioner of Taxation v. James Flood Pty Ltd. [1953] HCA 65; (1953) 88 CLR 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 disinclined 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 s. 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 not feel confident myself that the use of the 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 s. 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. (at p623)

11. In my opinion, the language of Dixon J. in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 CLR 179, at p 207 needs to be carefully perused and applied. Granted that exhaustive definition of what may be denoted by the word "incurred" in s. 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. Federal Commissioner of Taxation [1944] HCA 28; (1944) 71 CLR 596, at p 606 clearly enough indicates that to satisfy the word "incurred" in s. 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 the 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 Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 207 which presently needs emphasis is that the word "incurred" in s. 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". (at p624)

12. 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, 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. (at p624)

13. 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. (at p624)

14. All that then can really be said is that it has become certain that, in due course when further events occur, that 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 connexion 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. (at p624)

15. 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 s. 51 (1). (at p625)

16. These considerations, in my opinion, are the foundation for the view that no deduction under s. 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 s. 51. (at p625)

17. For these reasons, I would dismiss the taxpayers' appeals. (at p625)

GIBBS J. In each of these appeals the appellant company (the taxpayer) had, in the year of income (the year ended 30 June 1974), a number of employees whose conditions of employment were regulated by the Metal Industry Award 1971 and the Metal Trades (Long Service Leave) Award 1964. Some of those employees, having completed fifteen years' service, were entitled to take long service leave under the latter award, and would be entitled to receive payment for the period of the leave when they took it. A second class of employees, having been continuously employed for over twelve months, was entitled to take annual leave under cl. 25 of the former award, and each employee would be entitled, before going on leave, to 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. None of these employees in fact took long service leave or annual leave, or received any payment in respect of any such leave, during the year of income. The question for decision is whether the taxpayer was entitled to deduct from its assessable income the amount which it was calculated that the taxpayer would be required to pay to the employees entitled to leave when they took it, or so much of that amount as was attributable to the year of income. A similar question was raised in respect of a third class of employees who, having served for less than twelve months, had no present vested entitlement to annual leave, but for reasons that will appear the answer to this question is quite clear, and in referring to the facts of the case I need not separately mention those relevant to this class. (at p626)

2. The liability of the taxpayer to make payment to the employees in respect of long service leave or annual leave depends entirely on the provisions of the awards. Those provisions are fully discussed in the judgments of the courts below, and it is unnecessary here to refer to them in detail, since there is now no controversy as to their effect for purposes relevant to the present appeals. The employees with fifteen years' service were indefeasibly entitled to long service leave. An amount in respect of that leave would have to be paid sooner or later. It is true that the payment might not necessarily be made to the employee (since he might die) or by the taxpayer (since, theoretically at least, the employee, before taking leave, might become employed by another employer to whom the business might have been "transmitted"). It is true also that the amount ultimately payable could not be known with certainty during the year of income because award rates might alter thereafter. However, whatever effect these matters might have had if they stood alone, there was, in addition, the crucial circumstance that the taxpayer was under no liability to make any payment until the employee took the leave, unless, before that event occurred, the employee died or his employment was terminated. Similarly, although an employee who had served continuously for a year was indefeasibly entitled to annual leave, the employer was under no liability to make any payment in respect of the leave until it was taken, or the employee's service was terminated. (at p626)

3. It follows from what has been said, and was indeed common ground, that during the year of income the taxpayer not only did not pay, but was not liable to pay, any amount in respect of the long service leave or the annual leave which the employees were entitled to take but did not take during that year. However, the learned primary judge accepted the evidence of accountants called by the taxpayer, the effect of whose evidence, he said, was "that prudent accounting would require that the income of a taxpayer . . . should be reduced in any year by a provision representing, as accurately as possible, the sum which the taxpayer, at the particular accounting period, could reasonably anticipate that he will be required to pay to employees by way of Long Service Leave pay". It may be accepted that in ascertaining the profits of a year of income it would accord with accounting practice to have regard to that portion of the amount that the employer would be expected to pay to his employees in respect of long service leave and annual leave that could properly be related to the service of those employees during that year. (at p627)

4. The first argument on behalf of the taxpayer was that the amount calculated to be payable to the employees in respect of leave, or alternatively the part of that amount attributable to the year of income, was a loss or outgoing "incurred" in the year of income, within the meaning of s. 51 (1) of the Income Tax Assessment Act 1936, as amended. The provisions of what is now sub-s. (3) of s. 51 did not form part of the section at the relevant time. The argument was that during the year of income in question the taxpayer was "definitively committed" to the payments in respect of the leave, and was under a present accrued liability to make the payments. The principle to be applied in deciding whether a loss or outgoing was "incurred" is clear enough. It is not necessary that there should have been any actual disbursement: New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 CLR 179, at p 207 ; Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation (1944) 71 CLR 596, at p 606 ; Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492, at pp 506-507 ; and see King v. Commissioner of Inland Revenue (1974) 2 NZLR 190, at pp 194-195 . Indeed, it was suggested in Federal Commissioner of Taxation v. James Flood Pty. Ltd. that it is not necessary that there should be an immediate obligation enforceable at law whether payable presently or at a future time, or that the obligation should be indefeasible. It is not now necessary to consider whether those suggestions should be accepted as correct. But what is clearly necessary is that there should be a presently existing liability. In Federal Commissioner of Taxation v. James Flood Pty. Ltd., this was expressed by saying that the provisions of s. 51 (1) cover "outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement", and that those provisions "do not admit of the deduction of charges unless . . . the taxpayer has completely subjected himself to them". In other words, s. 51 (1) does not cover "a loss or expenditure which is no more than impending, threatened or expected": New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 195 . (at p627)

5. If these principles are applied to the present case, the question is whether the taxpayer was under a present liability to make a payment to its employees in respect of leave. The answer is that it was not. The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing "incurred" within s. 51 (1). (at p628)

6. We were referred to the decision of the House of Lords in Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1956] UKHL 4; (1957) AC 334 , where it was held that the taxpayer was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be payable to its employees, as it had the benefit of the employees' services during that year, provided the present value of the future payments could be fairly estimated. This decision may be explained by the fact that under the English legislation it is necessary to compute the profits or gains of the taxpayer in the year in question. To enable the true profit to be determined it is necessary to deduct from receipts any sum which is an essential charge against those receipts. In deciding how the profits are to be ascertained the courts have regard to ordinary commercial principles. Under the Australian legislation, however, the question what losses and outgoings arising in the course of a business are to be deducted is a matter which is covered by s. 51 (1) and depends, inter alia, on the question whether the loss or outgoing has been "incurred". The difference between the English and the Australian legislation in this regard was explained in Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR, at pp 505-506 . (at p628)

7. On behalf of the taxpayer there was advanced an alternative argument with which it is convenient to deal without pausing to consider whether the notices of objection entitled the taxpayer to rely upon it. This argument was that to enable the assessable income of the taxpayer to be ascertained it was necessary to take into account the sums that would be payable in respect of leave, since the application of recognized commercial principles and standard accounting methods would require those sums to be taken into account in order to arrive at the true income. It was further submitted that where the taxpayer had properly lodged a return of income on an earnings or accruals basis, the income was the same as the balance of profits or gains and should be ascertained accordingly. Reliance was placed on such cases as Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation [1951] HCA 35; (1951) 82 CLR 364 and International Nickel Australia Ltd. v. Federal Commissioner of Taxation [1977] HCA 49; (1977) 137 CLR 347, esp at pp 352-354, 366-367 . They were cases where the question was one of ascertaining income, and not of deciding what deductions were allowable from income once it was ascertained. The income was ascertained by means of a commercial profit and loss account. In relation to cases of that kind, I said, in International Nickel (1977) 137 CLR, at p 352 :
"Where the income of the taxpayer is derived from trade, there is not really a difference between the concept of income and that of profit which is significant for the purpose of answering questions arising under the Act, as Walsh J. pointed out in J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 80; (1971) 124 CLR 421, at p 433 ."
My remarks, like those of Walsh J., were directed to the case where the question, properly regarded, was the ascertainment of income. They obviously do not mean that a trader who submits returns on an earnings basis can successfully claim that all deductions which might on commercial principles be considered in ascertaining profit can be made in determining the income, whether or not those deductions fall within s. 51. Such an approach would leave little scope for the operation of the section, and would be contrary to the approach which the courts have consistently adopted in Australia. In J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation (1971) 124 CLR, at p 434 , Walsh J., after making the remarks to which reference has been made above, went on to say:
" . . . the differences between the Commonwealth Act and the English income tax law may more often be of importance in deciding questions as to the allowance of deductions (as for example in Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492 ) than in determining the manner in which, or the period at which, items of revenue should be taken into account in computing income (or profits) and in particular in determining the use which may properly be made of the principles and methods recognized and followed in making those computations in business and in commerce."
In Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation [1951] HCA 35; (1951) 82 CLR 364 , it was because Fullagar J. considered that the matter was one of arriving at the correct figure representing income, and that s. 51 really had no bearing on the case that he held that the case depended on "the conceptions of business and the principles and practices of commercial accountancy" (1951) 82 CLR, at p 368 . For once income has been ascertained, and the question is whether a deduction is allowable, "it is not a matter depending upon proper commercial principles or accountancy practice but upon the legal criterion set by s. 51 (1)": Caltex Ltd. v. Federal Commissioner of Taxation [1960] HCA 17; (1960) 106 CLR 205, at p 218 . (at p630)

8. In the present case it would be unreal to say that the income of the taxpayer could only be determined by having regard to the amounts payable in the future in respect of leave due to its employees. The true question is whether the amounts could properly be claimed as deductions under s. 51. That this was the correct approach is clearly recognized by the Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492 and Federal Commissioner of Taxation v. Northern Timber and Hardware Co. Pty. Ltd. [1960] HCA 93; (1960) 103 CLR 650, at p 655 . It appears that in Federal Commissioner of Taxation v. James Flood Pty. Ltd. the employees had not sufficient service to qualify them for leave during the year in question, so that the decision covers only the situation of the third class of employees in the present case. However, for the reasons which I have given, the principles there expounded lead to the conclusion that none of the amounts claimed, in respect of any of the classes of employees here in question, are deductible. (at p630)

9. In my opinion, the conclusion reached by the majority of the learned judges in the Federal Court was correct and the appeals should be dismissed. (at p630)

STEPHEN J. I would dismiss these appeals for the reasons appearing in the judgment of Gibbs J. (at p630)

MASON J. I agree that the taxpayers' appeals should be dismissed, generally for the reasons given by the Chief Justice. (at p630)

2. Those reasons, so it seems to me, give expression to the principle on which Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492 and Federal Commissioner of Taxation v. Northern Timber and Hardware Co. Pty. Ltd. [1960] HCA 93; (1960) 103 CLR 650 were decided. Flood dealt with annual leave, Northern Timber with long service leave. As Deane J. said in the Federal Court (1979) 41 FLR, at p 47; 27 ALR, at pp 249-250; 10 ATR, at pp 263-264; 79 A.T.C., at p. 4527. :
" . . . at the heart of the joint judgment in the James Flood Case 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 s. 51 (1) of the Act, their Honours accepted the jurisprudential analysis as the relevant one."
In Flood the Court in its unanimous judgment observed (1953) 88 CLR, 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 (1953) 88 CLR, 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." (at p631)

3. The Court concluded: "On this ground the taxpayer fails. This conclusion only means that pay for annual leave is deductible year by year as it is paid." (at p631)

4. The consequence is that an employer is not entitled to deduct as outgoings under s. 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. (at p632)

5. I agree with the Chief Justice's comment on the observations of Dixon J. in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 CLR 179, at p 207 . And I do not understand R.A.C.V. Insurance Pty. Ltd. v. Federal Commissioner of Taxation (1975) VR 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 s. 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. Federal Commissioner of Taxation (1977) 14 ALR 651; 7 ATR 435; 77 ATC 4186 falls into the same category. See also Commonwealth Aluminium Corporation Ltd. v. Federal Commissioner of Taxation (1977) 7 ATR 376; 77 ATC 4151 where the taxpayer completely subjected itself to liability to pay royalties. (at p632)

MURPHY J. In the light of the previous decisions, particularly Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492 , the appeals should be dismissed. (at p632)

AICKIN J. I have had the advantage of seeing the reasons for judgment prepared by the Chief Justice and those prepared by Mason J. (at p632)

2. I agree with both those judgments and the conclusions which they express. I have nothing to add. (at p632)

WILSON J. I also agree that these appeals should be dismissed for the reasons given by the Chief Justice and Mason J. (at p632)

ORDER

Appeals No. 90, No. 91, No. 92, No. 93, No. 94 and No. 95 of 1979 dismissed with costs.