INCOME TAX: Allowable deductions - outgoings- whether outgoing incurred on amount which is defeasible or is payable in the future - capital - income - distinction between capital and income The Full Court of theFederal Court of Australia, in a case involving a claim by the taxpayer for the deduction of an outgoing under s. 51(1) of the Income Tax Assessment Act 1936 held, inter alia, that -

1. an outgoing may be incurred notwithstanding that the amount is defeasible or is payable in the future: and

2. It is not necessary that the outgoing be one both due and owing at the time it is "encountered". In its joint judgment, the Full Court observed, inter alia.

1. A loss or outgoing to be deductible under s. 51(1) must be incurred in the year of income. What is meant by the word "incurred" in this context has been the subject of considerable discussion in the cases. Central to that discussion in the classic statement of Dixon J in New Zealand Flax Investment Ltd. v. Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] 88 CLR 492 at 407. His Honour there said:

To come within that provision there must be a loss or outgoing actually incurred. '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.

Some propositions are now well established. Outgoings may be incurred though the sum in question has not yet been paid or the liability discharged: New Zealand Flax Investments Ltd. and James Flood Pty. Ltd. An outgoing may be incurred notwithstanding that it may be defeasible. Commonwealth Aluminium Corpn. Ltd. v. Federal Commissioner of Taxation 77 ATC 4151 at 4160-1, cited with approval in Federal Commissioner of Taxation v. Australian Guarantee Corpn. Ltd. [1984] 2 FCR 483, per Toohey J at 487; 54 ALR 209; RACV Insurance Pty. Ltd. v. Federal Commissioner of Taxation [1974] 3 ALR 600; 22 FLR 385 and Commercial Union Assurance Co. of Australia v. Federal Commissioner of Taxation [1977] 14 ALR 651; 32 FLR 32. An outgoing may be incurred notwithstanding that the amount of that the outgoing is payable in the future. It is not necessary that the outgoing be one both due and owing at the time it is "encountered": James Flood Pty. Ltd. at 507; Federal Commissioner of Taxation v. Australian Guarantee Corpn Ltd. However, "a liability which has not 'come home' in the year of income, in the sense of pecuniary obligation which has become due" will not have been incurred until the year of income in which there is a presently existing liability: Nilsen Dvpt. Laboratories Pty. Ltd. v. Federal Commissioner of Taxation [1981] 33 ALR 161; 144 CLR 616 at 623 per Barwick CJ and at 627 per Gibbs J. As the Australian Guarantee Corp. case demonstrates, evidence of commercial and accountancy practice may be relevant in determining whether an outgoing in referable to the accounting period in which it is formed although such evidence will not be a substitute for the words of s. 51(1) itself: per Toohey J (FCR at 492-3), per Mc Gregor J (FCR at 501-3); see also Hooker Rex Pty. Ltd. v. Federal Commissioner of Taxation [1988] 79 ALR 181 at 189, 203. It may be noted that in the present case no evidence of this kind was adduced by the Commissioner.

2. The classic test for resolving the distinction between capital and income is that enunciated by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337 at 363:

There are, I think, three matters to be considered:

(a) the character of the advantage sought, and in this its lasting qualities may play a part.

(b) the manner in which it is be used, relied upon or enjoyed and in this and under the former head recurrence may play its part and

(c) the means adopted to obtain it; that is, by providing a period