TaxTMI 
TaxTMI 
1995 (10) TMI 223
X X X X Extracts X X X X
X X X X Extracts X X X X
.... upon "assessable income," which by section 65(2)(a) of the Income Tax 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 d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred." These sections have been construed to mean that in the calculation of the profits or gains of a business, the 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 diffic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....act analysis of the legal form of the relevant obligation . . . you get into a world of unreality if you try to solve your problem in that way, because, where you are dealing with a number of similar obligations that arise from trading, although it may be true to say of each separate one that it may never mature, it is the sum of the obligations that matters to the trader, and experience 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 jurispruden....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich would be deductible on normal accounting principles. This was a submission which, in view of the weight of contrary authority in New Zealand, he had felt unable to make to the Court of Appeal. Their Lordships think that it is not without a certain attraction, but would be reluctant to adopt so revisionist an approach without a more thorough inquiry into its possible repercussions on other parts of the legislation and the commercial practices 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 fol....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... matter. There are two other principles which must also be taken into account. The first is that although the jurisprudential approach prevents one from treating an aggregate of contingent liabilities as a statistical certainty, it does not rule out statistical estimation of facts which have happened but are unknown. Thus in R.A.C.V. Insurance Pty. Ltd. v. Commissioner of Taxation [1975] V.R. 1 an insurance company carrying on accident business was allowed to make a deduction from its premium income 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 acci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether the taxpayer is "definitively committed" to an expenditure or whether it is merely "impending, threatened or expected" (to adopt the language used in the leading case of Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] 88 C.L.R. 492, 506-507) does not depend simply upon whether future events which may determine liability are expressed in the language of contingency or defeasance. Their Lordships think it would be strange if a concept so eminently practical as the computation 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. ....