TMI Blog1995 (10) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act 1976 includes All profits or gains derived from any business. The term profits or gains is not defined. Prima facie, therefore, it bears its ordinary meaning as it would be understood by a businessman or accountant. As Dixon J. said in Commissioner of Taxes (South Australia) v. Executor Trustee and Agency Co. of South Australia Ltd. [1938] 63 C.L.R. 108, 152 : Income profits and gains are conceptions of the world of affairs and particularly of business . . . in nearly every department of enterprise and employment the course of affairs and the practice of business have developed methods of estimating or computing in terms of money the result over an interval of time produced by the operations of business, by the work of the individual, or by the use of capital. The practice of these methods of computation and the general recognition of the principles upon which they proceed are responsible in a great measure for the conceptions of income, profit and gain and, therefore, may be said to enter into the determination or definition of the subject which the legislature has undertaken to tax. The evidence of accounting practice adduced before Doogue J. left ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income side of the account is computed according to normal accounting principles but that expenditure or loss may be deducted only if it can be brought within the terms of section 104. In this respect the New Zealand Income Tax Act 1976 differs from the United Kingdom Taxes Acts, which contain the equivalent of section 101 (section 817(1)(a) of the Income and Corporation Taxes Act 1988) but no equivalent of section 104. The United Kingdom courts, faced with a statute which says that no deductions are to be allowed except those expressly enumerated and then fails to enumerate any permitted deductions, have felt able to treat the concept of profits or gains as containing within itself a direction to make such deductions as normal accounting practice would require for the purpose of computing profits or gains. But section 104 of the Act of 1976, which does expressly define the scope of the permitted deductions, makes it difficult to apply an accounting practice which is not in accordance with its express terms. In addition, although not for present purposes relevant, there is section 106, which prohibits the deduction of various enumerated items of expenditure even if they come wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rience may show that, while each remains uncertain, the aggregate can be fixed with some precision. The second point is that the question of whether the expenditure has been incurred involves characterising the nature of the legal relationship between the taxpayer and the person to whom the obligation is owed. On one view, it requires one to decide as a matter of construction whether the obligation is contingent or vested but defeasible. This is a nice distinction which can easily become a matter of language rather than substance and on which judicial views may differ ; for an example, see Commissioner of Inland Revenue v. Glen Eden Metal Spinners Ltd. [1990] 12 N.Z.T.C. 7,270. Both points illustrate the fact that this construction involves taking what the Australian courts have called a jurisprudential rather than a commercial view of the meaning of incurred. This is an unusual approach to a taxing statute and their Lordships detect in the Australian cases some degree of tension between loyalty to formal legal doctrine and reluctance to accept a computation of taxable profits which is wholly divorced from commercial reality. Although there are clearly parallels between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices which may have been designed around the established view of the law. Since their Lordships feel able to dispose of this appeal on the basis of existing authority, they would prefer to keep the more fundamental point open. Since the question of whether the warranty costs have been incurred within the year in which the vehicle was sold is primarily a matter of construction, their Lordships must set out the terms of the warranty. Strictly speaking, the warranty is given by the franchised dealer to the retail purchaser, but since the taxpayer agrees to indemnify the dealers against the cost of warranty claims, any obligation incurred by the dealer will result in a simultaneous obligation being incurred by the taxpayer. The warranty is as follows : 1. The vendor of the new vehicle described herein warrants to the original purchaser and subsequent owners that if in normal use and service during the relevant warranty period as provided below any defect appears in the material or workmanship of any part of the vehicle not otherwise warranted, and as soon as reasonably possible within 21 days of becoming aware of the defect, the purchaser returns the vehicle to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of an estimated sum to represent its liabilities incurred but not reported. These liabilities were not in law contingent. The accidents which gave rise to the company's liability had happened but the company did not know about them. A similar decision was reached in Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation [1977] 14 A.L.R. 651. Both cases were cited with approval in the High Court of Australia by Mason J. (with whom Aickin and Wilson JJ. agreed) in Nilsen Development Laboratories Pty. Ltd. v. Federal Commissioner of Taxation [1981] 144 C.L.R. 616, 632. The judge distinguished them from the cases on contingent liabilities because the accidents which gave rise to the liabilities under the policies had occurred during the relevant year of account. In the later case of Coles Myer Finance Ltd. v. Federal Commissioner of Taxation [1993] 176 C.L.R. 640, 679, McHugh J. remarked that the insurance cases involved a strained application of the earlier Australian decisions. This is true only in the sense that from a practical point of view, the distinction which they draw is irrelevant. But jurisprudentially the difference is clear enough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of profits for income tax depended upon theoretical distinctions more appropriate to the rule against perpetuities. The question is rather whether, in the light of all the surrounding circumstances, a legal obligation to make a payment in the future can be said to have accrued. For this purpose, merely theoretical contingencies can be disregarded. In Coles Myer Finance Ltd. v. Federal Commissioner of Taxation, 176 C.L.R. 640, 671-672, Deane J. gave some examples of linguistic contingencies which were so unlikely as not to affect the certainty of the obligation. And in Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation, 14 A.L.R. 651, 659-660, Newton J. felt able to disregard a condition in an insurance policy requiring notice of the occurrence of an insured event to be given within a stipulated time on the ground that, according to the evidence, the condition was hardly ever insisted upon. If one asks whether in respect of each of the vehicles sold by the taxpayer, the warranty conditions make its liability contingent in substance as well as in form, the answer must be yes. A substantial number 37 percent will have no defects at all. But, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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