Australian Business Law the Meaning

Australian Business Law

The meaning of incurred is fundamental to the operation of ITAA97 sec 8-1 (1). Explain the meaning of the term: incurred with reference to applicable case law.

Under the law incurred means that the income or expense was taking place during a specific reporting period. This requires that the individual or corporation must include these figures with their income tax fillings. Otherwise, they have broken the reporting provisions of the act. (Common Wealth Consolidated Acts 2012)

Evidence of this can be seen with ITAA97 sec. 8-1(1) saying, "The income year is the basic meaning is given by subsections 4-10(2) and 9-5(2). Some provisions refer to a particular income year. (They may describe it in different ways: for example, as the income year ending on 30 June 1998, or the 1997-98). For an entity that adopts an accounting period in place of the particular income year, the references include: (a) the adopted accounting period; or (b) if the adopted accounting period ends under section 18A of the Income Tax Assessment Act of 1936. (i) in relation to the commencing of the income year -- the adopted accounting period (as ending under that section); or (ii) in relation to the ending of the income year --the accounting period ending under that section on the day on which the adopted accounting period would (but for that section) have ended." This showing how the definition of incurred is based upon the point in time that the individual or organization is receiving the funds. As a result, these earnings have to be reported within the time period they are obtained from the other party. (Common Wealth Consolidated Acts 2012)

These different elements are showing how the meaning of incurred is based upon the time that someone receives the money. In ITAA97, it is very clear about these definitions and when they are to be applied. This requires everyone to follow these provisions when reporting the amount of income over a select period of time. (Common Wealth Consolidated Acts 2012)

Do you think the decision in ANZ Banking Group v FC of T. 94 ATC4026 changes the meaning of this particular term?

In ANZ Banking Group v FC of T. 94 ATC4026, there were issues surrounding when incurred actually takes place. This is because ANZ is considered to be a large financial conglomerate. One of its core businesses is insurance. During the process of making a claim to someone, who was injured on the job, there were issues about when this definition would apply. This is because the money was received by the individual when the calendar year was changing. ANZ reported the funds on the last year's income. While the individual waited to report the income until the end of the next calendar year. (Taxation Determination 2010) (ANZ Banking Group v FC of T. 94, 2011)

This created confusion about how and when the definition should be applied under ITAA97 sec. 8-1(1). What the court determined is that incurred is applicable the moment the funds are disbursed from the insurance company to the other party. This is because they are making this amount available to the beneficiary on specified date. Under the law, this is where the individual is officially receiving the funds (even though they have not physically taken possession of the money). (Taxation Determination 2010) (ANZ Banking Group v FC of T. 94, 2011)

Evidence of this can be seen with the court saying, "The Full Federal Court considered that the Accident Compensation Act 1985 (Vic) creates a presently existing liability to make payments in the future from the moment an employee suffers an injury at work. Such a liability, though perhaps ultimately defeasible, is still a liability 'incurred' within the meaning of section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') (formerly section 51(1) of the Income Tax Assessment Act 1936 ('the ITAA'). Accordingly, the Court held that a deduction is allowable in the year in which the liability arises notwithstanding that the actual payments are not made until a later year. The Court also held that the provisions for such deductions should be bona fide, capable of reasonable estimation and acceptable to the company's auditors to enable certification as a true and fair view of the company's accounts. In view of the decision of the Court (as it applies to workers' compensation claims) the Commissioner will allow similar claims by self-insurers for workers' compensation liabilities under section 8-1 of the ITAA 1997 in the following circumstances: (a) where employers are entitled to self-insure under their relevant workers' compensation / workcare legislation; and (b) the relevant workers' compensation / workcare legislation operates so as to fix the liability on an employer at the time the accident occurs; and (c) the calculation of the provision is made with regard to the relevant principles set out in Taxation Ruling it 2663 (Basis of Assessment of General Insurance activities) and Taxation Ruling TR 95/5 (Basis of Assessment of Reinsurance Activities)." This is showing how the definition of incurred is based upon the moment that funds are sent from one party to the other. If they received it when the calendar year is changing, it will apply to the previous year (even though the other party may not physically have the money until the next year). (Taxation Determination 2010) (ANZ Banking Group v FC of T. 94, 2011)