The Meaning of “Incurred”

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The concept of incurred is a critical term in the determination of deducibility of an expense. While the meaning of “incurred” is clearly formed based on case law decisions, decision on insurance company even a self-insurer is somehow different from other types of cases. The ANZ case is certainly a representative example, but such difference does not contrary to its general meaning in substance. To establish general meaning of “incurred”, judgements are formed based on some cases. W Nevill & Co Ltd v FC of T (1937) 56 CLR 290 indicates that “incurred” does not require actual payment, it is based on whether a definite liability exists or not. New Zealand Flax Investments Ltd v FC of T(1938) 61 CLR 179; 5 ATD 36 states that “incurred” can be encountered, defrayed but should not include “impending, threatened or expected losses”.(Woellner 2012) The most illustrative case on “incurred” is FC of T v James Flood Pty Ltd(1953)88 CLR 492. In this case, holiday pay entitlement would be given only if employees meet certain period of service. The taxpayer seeks deduction on provision for holiday pay by apportionment for those employees not meeting certain requirement for this income year. Court rejected the claim. (Woellner 2012) Because it is possible that employees cannot meet such requirement and lose the right to receive holiday payment, liability does not definitely arise. Thirty years later, Nilsen Development Laboratories Pty Ltd v FC of T(1981)144 CLR 616, 627; 81 ATC 4031,4037 considers James Flood case and judgers made additional explanation. “Incurred” means there must be a “present existing liability”. Whether the payment made at present or at future is not a matter and whether the liability defeasible or not is not taken into consideration.(Wollner 2012) By extending the decision on James Flood case, FCT v Malouf(2009) ATC specifies the time of “incurred” under a payment contract.(Douglas 2011, p379) Judger explained the view that entering into a contract did...
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