The taxation treatment of long-tail liabilities

Long-tail liabilities arise ‘where the conduct of a company results in individuals suffering a personal injury that will only become manifest at some indefinite future time, due to its latency period.’1 These potential victims of harm are referred to as unascertained future claimants (UFCs). The most striking recent example of the issue of long-tail liabilities has been the claims by asbestos victims against the James Hardie companies. This paper will begin by examining the United States experience of providing for UFCs which was considered by CAMA C in formulating some of its recommendations. The recommendations of CAMA C will then be examined. The paper will then examine the accounting treatment of UFCs in Australia. The Australian Accounting Standard 137, Provisions, Contingent Liabilities and Contingent Assets, provides for the disclosure of UFCs in company financial statements. However, Australian corporations law does not recognise UFCs as creditors and so UFCs are not protected in the event of company insolvency. Although the courts in Australia may take into account the interests of UFCs, this use of the courts’ discretionary powers does not amount to giving UFCs enforceable creditor rights.