KP Brady Ch
LC Voumard M
JE Stewart M
No. 2 Board of Review
K.P. Brady (Chairman), L.C. Voumard and J.E. Stewart (Members): The year of income in issue in this reference is that ended 30th June, 1977, and concerns a taxpayer who commenced a starting price bookmaking business in his home State of P early in that same year of income. In his return of income he claimed deduction for a bad debt of $40,000 occasioned by a client being unable to settle for a sequence of losing bets placed on various interstate horse race meetings. It seems that the incidence of that bad debt caused the taxpayer to terminate his S.P. bookmaking activity in October 1976, and subsequently in that same year of income he operated for a short time through a registered bookmaker, in which pursuit he again made a loss.
2. It is pertinent to state early in these reasons that, whilst the taxpayer's S.P. bookmaking business was unlawful, the income derived from it is assessable, no differently from that of a lawful business (ref.
Southern (H.M. Inspector of Taxes) v. A.B. (1933) 18 T.C. 59). Similarly, the requirement contained in the Assessment Act per sec. 262A that every person carrying on a business shall keep records in the English language to enable his assessable income and allowable deductions to be readily ascertained applies equally to a person conducting an unlawful business as to a person running a lawful business.
3. The claim for deduction of the bad debt was made as part of a loss of $43,838 made on the taxpayer's bookmaking activities. A schedule accompanying the return provided the following further information:
``$ $ Net receipts after payouts 3,989 Bad debts 40,000 Telephone 1,330 Market service 410 Casual wages 330 Rent 180 Stationery 146 Postage 64 42,460 ------ ------ 38,471 ------''
The taxpayer also operated for a short time through a registered bookmaker.
``Held 23,087 Payout 26,891 ------ Gross loss 3,804 Turnover tax 577 Licence 324 Rent 300 Clerks 170 Casual wages 112 Tickets 62 Stationery 18 1,563 --- ------ Net loss 5,367 ------ Total bookmaking loss $38,471 + $5,367 = 43,838 ------''
4. It seems that the defaulting debtor, whom we shall call S, was introduced to the taxpayer, whom we shall call A, by another bookmaker soon after the taxpayer commenced business. S was a professional punter with a reputation for being a prompt payer, and so A permitted him to bet on credit. The debt of $40,000 arose from a series of losing bets which S transacted with A in August 1976, soon after the latter commenced business.
5. It is necessary to pause here to briefly describe A's modus operandi because, in
ATC 383his notice of objection against the Commissioner's disallowance of his claim, he has contended that the debt is properly deductible under sec. 63, or (as an alternative ground), it (the bad debt) was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing such income and so allowable under sec. 51(1). We were informed that A conducted his S.P. bookmaking business only with interstate clients to minimise the risk of apprehension by the police, the view apparently being taken that that risk was greater when the business was conducted locally. S, who was a resident of State R, was his biggest client. A's practice was to place back-bets with other S.P. bookmakers when considered expedient to do so. The following excerpt from A's evidence-in-chief describes the procedure:
``Q. In respect to the operation of this S.P. bookmaking business, when you received a substantial bet from (S) what would you do? - A. Well, depending on the price of the horse - for instance if it was a bet of say $2,000 each way on a horse I would have most probably held $500 each way and laid off $1,500 each way but the price of the horse decided what I laid off. There was one particular bet after looking at figures that I can recall he had a bet of I think a thousand each way on an 8/1 chance; well in a bet like that I would probably most likely only retain $75 each way and lay the lot off. The bookmakers I laid the money off with were all paid and naturally when (S) did not pay I was out of pocket.''
6. At the hearing, A's counsel interpreted the alternative ground of objection as meaning not that the bad debt was itself deductible under sec. 51(1), but that such portion of it as was bet back was deductible, and submitted his arguments on that basis.
7. To complete the fact situation, it is necessary to state that attempts by A to obtain payment from S involving a number of interstate telephone calls, and two personal visits to S's home, were to no avail.
8. In the first instance, the taxpayer has claimed the bad debt as a deduction under sec. 63(1). That subsection, to the extent it is relevant, states:
``Debts which are bad debts and are written off as such during the year of income, and -
- (a) have been brought to account by the taxpayer as assessable income of any year;
shall be allowable deductions.''
We consider that a debt of $40,000 was certainly owing by S to A at 30th June, 1977, comprising moneys which A was presently entitled to receive (ref. the judgment of Menzies J. in
G.E. Crane Sales Pty. Ltd. v. F.C. of T. 71 ATC 4268 at p. 4272). It will be recalled that S was a professional punter and so maintained detailed records of his bets placed with both licensed bookmakers and S.P. bookmakers. He was called as a witness by A and tendered in evidence his ``day-book'' which was written up contemporaneously with placing his bets. That record showed the name of the horse on which the bet was placed, the venue of the race meeting, the date of the meeting, details of the bet and the name of the bookmaker, as well as a summary of his profit/loss situation for each meeting. All the bets made with A were detailed therein. He also tendered in evidence a schedule of his bookmaker creditors at 30th June, 1977, which included the debt of $40,000 due to A. Furthermore, he conceded that the debt was still unpaid.
9. We are of the view that sufficient grounds existed as at 30th June, 1977, for A to consider that the debt was bad. The question whether a debt is bad is one of fact, and will therefore be determined upon a consideration of the circumstances of each case (
Dinshaw v. Commr. of Income Tax (Bombay) (1934) 50 T.L.R. 527 (P.C.)). The criterion for a debt to be properly adjudged bad is not that anything might never be recovered from it but that the creditor must have honestly concluded in the circumstances of the particular case that the debt was bad. In
Elder Smith & Co. Ltd. v. C. of T. (N.S.W.) (1981) 1 A.T.D. 241, the Supreme Court of New South Wales considered that the debts must be passed ``as conjectural bad debts for the time being''.
10. Because the debt due from S arose from an unlawful transaction, A was aware that he could not sue for its recovery. He
ATC 384knew too from his bookmaking colleagues that S was making widespread losses on his gambling. In calling on S to demand payment, he was told that he (S) had liquidity problems but that he would see him eventually paid. Doubtless too, he was sufficiently realistic to know that licensed bookmakers, being in a position to implement legal proceedings against S, would be paid in priority to S.P. bookmakers, such as himself, who could not.
11. To this stage, therefore, we are at one with the taxpayer in finding that there was a debt which he had sound reason to consider bad. We have difficulty however in agreeing with his further contention that the debt was brought to account by him as assessable income. Because A conducted his S.P. bookmaking business only in the months of August/October 1976, before he had to terminate it for lack of funds, it follows that the amount of $40,000 had to be brought into his assessable income (if it were brought in at all) in the year of income in issue. The evidence, however, strongly suggests that it was not. On several occasions when giving evidence, A made the point that income in his situation was money only actually received; consequentially he did not regard as income debts which were due to him. In his evidence he said:
``I regard my business as a week-to-week proposition, and I regarded money I received as income; money not received is not income as far as I am concerned, and I conduct my business as such.''
12. The taxpayer's counsel tendered in evidence summaries of his client's betting operations covering not only the S.P. bets but also the bets which he had placed through the registered bookmaker when, because of S's bad debt, he had been forced to terminate his S.P. business. We were advised that the summaries had been compiled by the taxpayer from his bookmaker's diary, which record had since been destroyed.
13. An example of his financial reporting on his S.P. bookmaking at a particular meeting is as follows:
``13/8/76 + 1176 Exps:- Phones 630 Stat. 27 Markets 30 ----- + 489 -----''
Comment on the above figures was made by the taxpayer in cross-examination as follows:
``Q. Did you keep any sort of running record of your earnings for each particular week or each particular race meeting? - A. Yes.
Q. Did they show simply the money which you received and the money which you paid out, and the difference between the two? - A. Yes.
Q. Receipts and payments? - A. Yes.
Q. If we take that first entry, Saturday 13th August, 1976? - A. Yes.
Q. The top figure 1,176, is that plus 1,176? - A. Yes, I won $1,176.
Q. Does that mean that you actually received money to that...? - A. Yes.
Q. That 1,176 is the figure which shows the difference between the money that came to you and the money which you paid out? - A. Yes.
Q. And so for each of these figures; the next one of $3,028? - A. Yes.''
By adding the figures of receipts and payments for the meetings where he operated through a licensed bookmaker, we arrived at the loss of $5,367 summarised in para. 3 above. Similarly, we were able to effect a reconciliation between the cash profit/loss results of individual meetings where he operated as an S.P. bookmaker as contained in the summary sheets and the overall loss incurred on that activity as reflected in that same paragraph. Accordingly, it seems clear to us that the debt of $40,000 was not brought into the taxpayer's assessable income despite his protestations to the contrary. That being so, the stipulation contained in sec. 63(1)(a) has not been complied with, and therefore the claim for deductibility of the bad debt of $40,000 cannot be allowed. Speaking generally, it is
ATC 385impossible for a taxpayer to properly claim a bad debt as a deduction under sec. 63 if he is conducting his business on a cash basis; the requirement of sec. 63(1)(a) simply cannot operate in regard to such a business.
14. Because of that finding, we do not need to examine whether the debt was written off by A as required by the section. However, for completeness, we consider that the debt was not written off. A's counsel pointed to the following notation on his client's bets summary sheet which he contended was sufficient evidence of writing off for the purposes of the section:
``Bad Debit (Name and Address of S)''
We are unable to accept that argument. We appreciate that the nature of A's business probably precluded him from maintaining a comprehensive set of accounts, but we are of the view that something more was required than the above notation. Section 63(1) specifically states that debts which are bad must be written off in order to permit deductibility, and that requirement must be complied with. In the taxpayer's situation, we consider that at the very least he should have maintained an account for each debtor and that S's account should have been closed off upon his determination that the debt was bad; furthermore, S's account should have contained a notation to that effect. We regard the following statement made by the Chairman of this Board, as then constituted, in Case C11,
(1952) 3 T.B.R.D. 95 at pp. 96-97, as being apposite to A's situation:
``It is to be observed that sec. 63(1) deals with debts which would ordinarily arise in the course of carrying on a business. Paragraph (a) refers to debts which have been brought to account by the taxpayer as assessable income of any year. These would ordinarily be what are known as trade debts. There may be others, but, if so, they would be, at least, unusual. Paragraph (b) is, of course, confined to debts in respect of money lent in the ordinary course of business. It is surely not too much to expect that a taxpayer carrying on any sort of business will keep accounts recording the results and position of the business from time to time. Section 262A is a positive requirement that a taxpayer carrying on business shall keep sufficient records of his income and expenditure and it imposes a penalty for failure to do so. I am unable to see, therefore, why sec. 63 should be interpreted sympathetically in favour of a claimant who does not keep accounts or sufficient accounts. I am unable to subscribe to any theory that, where the allowance of a claim for deduction of a bad debt is dependent upon it having been written off as a bad debt, the condition is satisfied merely by making in writing a claim for its deduction - or by making lists of debts in respects of which deduction is claimed - whether the lists are attached to income tax returns or not. If such accounts as the taxpayer has kept in respect of such debts remain unaffected - if they are not closed off or endorsed in some manner, not necessarily in any highly technical manner, then I think there has been no writing off.''
15. Also, there was some doubt as to when the above notation had been made, the evidence suggesting that it was made subsequent to the year of income and not during the year of income, as required by the section (see also
Point v. F.C. of T. 70 ATC 4021 at p. 4023).
16. We consider, too, that the taxpayer's alternative ground of objection, that sec. 51(1) affords deductibility of the portion of the $40,000 that was bet back by A, must also fail because we simply do not know what that amount was. The most relevant evidence on the matter is contained in A's examination-in-chief as follows:
``Q. Can you give the Board an estimate of how much of the outstanding debt of $40,000 would have been placed with these other bookmakers as back bets? - A. Extremely hard to give an estimate because it would vary enormously on the particular wager at the time, whether it was on a long-priced horse or a short-priced horse, but I would estimate that at least 75% of the money invested by (S) was bet back with other bookmakers and it could even be a lot greater than that.''
17. Stemming from the absence of written records (the cheque butts evidencing payment of the losing bets having been destroyed by A), the Board was invited by the taxpayer's representative ``to do as best it can'' and make allowances for the fact that
ATC 386A was working in an illicit industry. But sec. 190(b) places the burden squarely on the taxpayer in proving that his assessment is excessive, and its terms are plain and unequivocal. The section states:
``Upon every such reference or appeal -
- (b) the burden of proving that the assessment is excessive shall lie upon the taxpayer.''
Gauci & Ors. v. F.C. of T. 75 ATC 4257, Mason J. discussed the ambit of sec. 190(b) and at p. 4261 expressed the following view, that view being later endorsed by a majority of the High Court in
McCormack v. F.C. of T. 79 ATC 4111 and in
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133:
``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.''
18. The taxpayer has not been able to adduce any evidence in support of his claim under sec. 51, and therefore we must dismiss it. The fact that he saw fit to destroy such evidence to better safeguard his interests in the event of arrest by the police cannot be advanced as an argument to have us exercise a discretionary power which in fact we do not possess.
19. In the result, we would uphold the Commissioner's decision on the objection and confirm the assessment.