Case C41

Members:
FE Dubout Ch
G Thompson M
N Dempsey M

Tribunal:
No. 3 Board of Review

Decision date: 25 June 1971.

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F.E. Dubout (Chairman): The facts in this reference may, for the purposes of my brief decision, be set out in the form of the statement of agreed facts which was received by the Board. After necessary alterations to exclude identifying particulars, these facts are as follows -

(a) The taxpayer is a private company, incorporated on 28 June 1963 and carrying on business as a builder.

(b) On 27 August 1963, the taxpayer acquired a lease of land from the Crown on which it thereafter erected a block of flats.

(c) On 7 April 1965, the company sold this land and buildings to M. Pty. Ltd. for $160,000, payable as to $16,000 by way of deposit, as to $64,000 payable on completion, and with payment of the balance deferred for 5 years.

(d) The unpaid balance of purchase money ($80,000) was secured by a mortgage over the said property, which was executed on 11 May 1965.

(e) Interest at the rate of 8% per annum was payable in respect of the loan. Repayments

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of capital were not required prior to the date of redemption but provision was made to enable redemption to be brought about after one year.

(f) The rate of 8% was approximately the general rate of interest for mortgages of this type in May 1965.

(g) On 27 July 1967, the amount of $80,000 secured by the mortgage was discounted by the taxpayer for $73,100 to a finance company.

(h) The purpose of discounting the loan by the taxpayer was to obtain additional finance to complete a special project.

2. The statement of agreed facts was supplemented by the oral evidence of the managing director of the taxpayer, and the documents by which the relevant transactions were effected were made available to the Board. The taxpayer's claim is to deduct the difference between the amount secured by the mortgage, $80,000, and the amount received from the finance company, $73,100, that is an amount of $6,900. The agreed facts as set out above serve to show how the claim for deduction has arisen, but it is now clear that some statements of fact have been very loosely, and in some instances misleadingly expressed. References to a ``loan'' by the taxpayer are incorrect, for the simple reason that it did not lend the $80,000 to M. Pty. Ltd. A mortgage may be given in respect of a debt previously incurred or in respect of a loan of money being currently granted. In this case, the mortgage was founded upon the already existing debt of $80,000 owing by M. Pty. Ltd. to the taxpayer.

3. There are also references to the ``discounting'' by the taxpayer of the amount of $80,000 or of the loan. It may be arguable that that was the practical effect of what was done, but it is not an accurate description of what actually occurred. On 25 July 1967, the finance company wrote to the taxpayer's solicitors, informing them that it had agreed to purchase the mortgage, and that the purchase price was to be $73,100. What the taxpayer then did was to sell the mortgage to the finance company. More precisely, in terms of the Memorandum of Transfer of Mortgage dated 27 July 1967, it transferred to the finance company ``all the estate and interest of which the company (i.e. taxpayer company) as registered proprietor together with all its rights and powers in respect thereof as comprised and set forth in Memorandum of Mortgage etc.''

4. I think it is beyond question that the transfer of the mortgage was undertaken for the purposes of the taxpayer's business, and if a loss was thereby incurred it was a loss necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The only question to be decided is whether it was a loss of capital or of a capital nature. I agree with my colleagues in saying that the mortgage was not accepted in satisfaction of the debt of $80,000 and that the indebtedness of M. Pty. Ltd. to the taxpayer remained quantitatively the same. From that point onwards, however, I feel, with respect, that I must take a different view of the matter from that taken by my colleagues. Although there was still a debt of $80,000 owing by M. Pty. Ltd. it seems to me that the character of the debt was entirely changed once it became a debt recoverable under the mortgage.

5. Collectively, it seems to me, the rights and powers conferred upon a mortgagee by a mortgage, including rights and powers that may ultimately extend to the land itself, constitute a piece of property. It is property capable of being valued and capable of being sold. I am unable to see it otherwise than as a capital asset. If it is sold at a loss, the loss is one of capital. The transfer of the mortgage by the taxpayer in the present case did not, in my opinion, amount to a discounting of the simple contract debt. It was a sale to the finance company of the mortgage itself, of the whole congeries of rights which inhered in it, one of which was the right to recover the balance of purchase money from M. Pty. Ltd.

6. I have considered carefully the case dealt with by Board of Review No.1, reported as
16 T.B.R.D. 418 Case R.83, not so much in relation to the actual decision on the facts, but rather in connection with the statements made by the Chairman, Mr. Burke, at p. 422, and his adoption there of the principle as set out in Challoner and Greenwood Income Tax Law and Practice, 2nd ed. at p. 518. In that part of his decision, Mr. Burke was concerned with deciding whether the loss in that case was allowable as a deduction under sec.63, as a bad debt. Likewise, the statement of principle set out by Challoner and Greenwood was made in the context of their commentary on sec.63. So far as the matter of losses on the sale or realisation of securities is concerned, I do not consider that principles that may be applicable in relation to sec.63 are necessarily, or for that matter, at all, applicable in relation to sec.51, where the capital nature of a loss or outgoing is fatal to a claim to deduct that loss.

7. In the present case, there was no claim, and in the very nature of things there could have been no claim, that the loss incurred was a bad debt or even something resembling a bad debt. The claim was made solely under sec.51, and since, for the reasons already stated, I would regard the loss as one of capital, my conclusion is that no deduction may be allowed in respect of the loss.

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8. Accordingly, I would disallow the taxpayer's objection and confirm the Commissioner's assessment.