Jenkinson J

Olney J
Sundberg J

Full Federal Court

Judgment date: 3 July 1996

Jenkinson, Olney and Sundberg JJ

The facts

The Administrative Appeals Tribunal stated a case for the consideration of the Full Court under s. 45(2) of the Administrative Appeals Tribunal Act 1975. The agreed facts are as follows. On 22 June 1990 an administrator was appointed to the Pyramid Building Society pursuant to s. 114 of the Building Societies Act 1986 (Vict) (``the Act''). On that date the applicant had money on deposit with the Society. On 25 June the Registrar of Building Societies, pursuant to s. 119 of the Act, served a notice on the Society directing it not to repay any deposit. On 13 December 1990 as the result of the issue of a certificate under s. 122 of the Act, the Society was wound up.

As at 24 June 1990 the applicant had $357,525.72 on deposit spread over four accounts. In August 1990 the State Bank of Victoria offered the Society's depositors 25 per cent of their account balances as at 24 June 1990. It was a condition of acceptance of the offer that depositors assign to the Bank their rights to payments by any administrator or liquidator of the Society in respect of 25 per cent of the debt due to them by the Society. The applicant accepted the offer, and subsequently received 25 per cent of the amounts outstanding in his accounts.

On or about 4 January 1991 the Treasurer of Victoria, on behalf of the Victorian Government, invited offers from depositors for payment of the remaining 75 per cent of their funds in consideration of the issue of Victorian Government Bonds with guaranteed payments over four years. Amongst other things, the offer document stated that a bank or other financial institution might be prepared to purchase the bonds ``so that you obtain an earlier return at a discounted rate''. The applicant made offers pursuant to the invitation in respect of each of

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the amounts outstanding in his accounts. The offers were accepted and bonds were issued to the applicant. The face value and market value of the applicant's bonds at the date of issue appear from the following table:
Account number     number      Face value       Market value

321 041 0041079    9-9219      $ 16,760.27      $ 12,288.75
321 026 0005023    6-8163      $ 18,744.37      $ 13,460.82
321 026 0005474    6-8517      $224,932.50      $154,026.18
321 026 0005475    6-8518      $  1,871.62      $  1,642.07

The applicant claimed, and the respondent allowed, a deduction in the sum of $5,535.52, being interest credited to the first mentioned account after 30 June 1989, the right to which was assigned to the Victorian Government in consideration of bond number 9-9219.

The applicant contends and the respondent disputes that the difference between the face value and market value of the bonds is allowable as a deduction under s. 70B of Income Tax Assessment Act 1936, and that he is therefore entitled to a deduction of $80,891.

The questions posed on those facts are:

  • 1. Is the applicant entitled to a deduction of $80,891 pursuant to s. 70B in calculating his taxable income derived during the year of income ended 30 June 1991?
  • 2. Is the applicant's loss for that year of income in respect of the accounts to be calculated pursuant to s. 70B having regard to the face value of the bonds or their market value as at the date of their issue?
  • 3. Is the money value of the bonds for the purposes of s. 21 their face value or their market value as at the date of issue?

The legislation

Section 70B(2) provides:

``Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any loss on the disposal or redemption is allowable as a deduction from the assessable income of the taxpayer of the year of income in which the disposal or redemptioin takes place.''

Expressions used in s. 70B are defined by reference to definitions in s. 26BB, sub-s. (2) of which includes in a taxpayer's assessable income the amount of any gain made on the disposal or redemption of a traditional security. The relevant definitions need not be set out, because it is common ground that the applicant's accounts with the Society were ``traditional securities'' and that he ``disposed'' of them to the Victorian government in exchange for the bonds.

Section 21(1) provides:

``Where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.''

The applicant's argument

The bonds carried the right to receive payment of their face value in instalments over four years. Thus the amount for which they could be immediately sold - their market value - was less than their face value. Section 21 applies because the consideration for which the traditional securities were exchanged was not cash but government bonds. It is therefore necessary to determine the ``money value'' of the bonds in order to ascertain whether the applicant made a gain or a loss on the disposal. The ``money value'' of the bonds is their market value - the price for which they could be sold. Reliance was placed on cases concerned with the valuation of shares:
Abrahams v. FC of T (1944) 70 CLR 23,
Gold Coast Selection Trust Ltd v. Humphrey (Inspector of Taxes) [1948] AC 459 and the case at 13 CTBR (NS) 88.

Abrahams was an estate duty case. Section 8 of The Estate Duty Assessment Act 1914 levied duty on the value of an estate. ``Value'' was not defined. At p. 29 of the report Williams J said that in determining the value of shares held by a deceased in a company, the articles of which contain restrictions on transfer, the court should ascertain the price which a willing but not anxious vendor could reasonably expect to obtain, and a hypothetical willing but not anxious purchaser could reasonably expect to have to pay, for the shares if the vendor and purchaser had agreed on a price in a friendly negotiation.

In the Gold Coast case, a company which dealt in stocks and shares and exploited and dealt in gold-mining concessions sold a concession, the consideration being expressed to be £800,000 to be paid by the issue of shares in the purchaser company of a par value equal to the price named. The Commissioners

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assessed the vendor to income tax based on the value of the consideration stated. The House of Lords remitted the matter to the Commissioners for reconsideration on the basis that the value of the shares was their actual value at the date of the transaction and not necessarily the value attributed to them in the sale agreement. Viscount Simon, with whom Lords Thankerton, Uthwatt and Du Parcq agreed, said that in determining what money equivalent should be taken as representing the shares, the Commissioners should fix an appropriate ``money value'' by taking all the circumstances into consideration. Lord Oaksey, who dissented in the result, said that the ``only true test of the money value of an article at a certain time is what can be got for it in money at that time''.

Case 88 concerned the value to be attributed to shares which had been exchanged for other shares. It is one of the few cases in which s. 21 has been considered. Mr Thompson, one of the Board Members, said the section was designed to deal with ``barter transactions'' where some of the elements which go to produce the assessable or taxable income are ``in kind'' rather than in cash. After saying that s. 21 applied to the case before him where the consideration for the transfer of shares was the issue of other shares, Mr Thompson referred to Abrahams and to an English decision in which it was said that ``the final test of what is the value of the thing is what it will fetch if sold''.

The only other case in which s. 21 appears to have been considered is
FC of T v. Energy Resources of Australia Limited 94 ATC 4923; (1994) 54 FCR 25 where Hill J, as a member of the Full Court, said at ATC p. 4950; FCR pp. 61-62:

``It is doubtful whether s. 21(1) did more than declare what the position of general law would, in any event, have been. Thus, for example, where land was sold in consideration of shares, the argument that no income was derived because the shares had not been realised was rejected in
Californian Copper Syndicate (Limited and Reduced) v Harris (1904) 5 TC 159. The section has not been the subject of judicial interpretation. In particular the word `cash' has not received scrutiny. The word is one the meaning of which may vary depending upon the context. The normal meaning of the expression is `ready money' or, as the Macquarie Dictionary (2nd Rev) observes, `money, esp money on hand, as opposed to a money equivalent (as a cheque)'.... In the present context clearly the meaning is not confined to money on hand. Rather the section is concerned with the distinction between consideration paid in cash, on the one hand, and consideration in kind, on the other.''

His Honour went on to say that ``cash'' in s. 21 did not refer only to Australian dollars, but included foreign currency.

In reliance on Abrahams, Gold Coast and Case 88 the applicant submitted that while the face value of the bonds may be their money value, it is not necessarily that value, and that where, as in the present case, the bonds have a market value which differs from their face value, the market value is their money value. Just as the issue price or par value of shares is not necessarily their value at a particular time, the value of the bonds should not be determined by reference to the ``total nominal value'' stated on their face, because that is no more than the total amount payable to the holder of the bond over the four year term. The applicant relied on Case 88 and Energy Resources for the proposition that shares were not ``cash'' within s. 21 but a consideration in kind, and submitted that the bonds too were not ``cash''.


Though attractively presented, the applicant's submissions cannot be accepted. Section 70B(2) allows as a deduction ``the amount of any loss on the disposal'' of a traditional security. Section 51(1), the general deduction provision, allows as a deduction ``all losses'' to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

It is a fundamental principle of Australian income tax law that rights to receive money and obligations to pay money are taken into account in calculating income and outgoings, gains and losses, at their nominal value. In
FC of T v. The Myer Emporium Ltd 87 ATC 4363, at pp. 4370-4371; (1986-1987) 163 CLR 199, at pp. 216-217 the High Court said:

``The accounting basis which has been employed in calculating profits and losses for the purposes of the Act is historical cost... not economic equivalence... And so a

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taxpayer who lends money for a stipulated period at interest is treated as exchanging the money lent for a debt of the same amount unless the loan is made at a discount or premium, in which case there may be a gain or loss on capital account... In the ordinary case, the debt is brought to account in the same amount as the money lent. The amount of the debt is not reduced because the lender is kept out of the use and enjoyment of the money lent for the period of the loan.

If economic equivalence were the appropriate accounting basis, the debt would be brought to account at the beginning of the period in an amount less than the amount of the money lent and would increase day by day until it equalled the amount of the money lent when the period expired.''

The accruals system of accounting proceeds from the basis that in calculating gains and losses it is the nominal value of money obligations that is taken into account. An accruals taxpayer brings to account an amount ``earned'' even though it may not be payable for some time. The amount brought to account as income is the nominal value of the amount earned at the time of derivation, and not the then value to the taxpayer of the right to receive that amount in the future. Thus in
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 5 ATD 98, at p. 132; (1938) 63 CLR 108, at p. 155 Dixon J, referring to
Thorogood's Case (1927) 40 CLR 454 (where the question was whether, in a business of buying land and selling it in subdivision on instalment contracts, future instalments of purchase money should be taken into account of taxable income derived during the accounting period), said that the court ``pronounced decisively against the inclusion of the present value of these future payments''. And when, in
Henderson v. FC of T 70 ATC 4016, at p. 4020; (1970) 119 CLR 612, at pp. 650-651, Barwick CJ, with whom the other members of the Court agreed, said that the fees of an accounting practice which had matured into recoverable debts, though unpaid, should be included as earnings, there was no suggestion that the fees were to be included at anything other than their nominal or face value. See also
J Rowe & Son Pty Ltd v. FC of T 71 ATC 4157, at pp. 4158-4159; (1970-1971) 124 CLR 421, at pp. 448-449.

Another consequence of the accruals system of accounting is that income is brought to account at the nominal amount even when the money is received before derivation. A taxpayer who receives a prepayment of professional fees is not required to bring to tax a greater sum than their nominal amount even though, as a prepayment, it will have a greater value at the time of subsequent derivation than if it had been paid at that time. Thus the fees paid in advance in
Arthur Murray (NSW) Pty Ltd v. FC of T (1965) 14 ATD 98; (1965) 114 CLR 314, which were not derived until the dancing lessons were given, would thereupon become part of the assessable income at their nominal amount even though paid in advance.

That is the profit, gain or income side of the coin. The other side is governed by the same principle. An accruals taxpayer brings to account a loss or outgoing incurred (s. 51) even though it may not be defrayed, discharged or borne for some time. The amount brought to account is the nominal value of the loss or outgoing at the time it is incurred, and not its actual value at that time. In other words, the taxpayer does not suffer a reduction in the amount of a deduction otherwise allowable by reason that the present value of the loss or outgoing at the moment it is incurred is less than the nominal amount of the money required to discharge it sometime in the future. An obligation to pay $100 in six months time is less onerous to the taxpayer than an obligation to pay that amount forthwith. Yet in both cases the deduction allowed is for the full $100. Cf.
New Zealand Flax Investments Ltd v. FC of T (1938) 5 ATD 36, at pp. 49-50; (1938) 61 CLR 179, at p. 207 and
FC of T v. James Flood Pty Ltd (1953) 10 ATD 240, at pp. 244-245; (1953) 88 CLR 492, at p. 507.

Coles Myer Finance Limited v. FC of T 93 ATC 4214; (1993) 176 CLR 640 is instructive in this connection. A finance company drew short term bills of exchange, procured their acceptance by a bank, and sold them at a discounted price. On maturity the bills were paid out at face value. Several bills were outstanding at the end of the tax year in which they had been drawn. It was held that the discounted amounts referable to them were losses or outgoings incurred by the taxpayer in that year within s. 51(1). The discount amounts were the cost of obtaining the finance. What is important for present purposes is that a doctrine

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of economic equivalence would have denied the taxpayer any deduction, because the amounts it received on the sale of the bills were the true value, at the dates of sale, of the amounts it was required to pay upon their maturity.

For the purposes of s. 70B(2), the applicant suffered no loss on the disposal of his traditional securities, because he received in exchange a promise to pay the face value of the bonds, albeit by instalments over a future period. The cases to which we have referred on the determination of losses in accordance with the doctrine of nominalism are of course s. 51 cases. But there is no reason why ``loss'' in s. 70B(2) should have a different meaning from ``losses'' in s. 51, and accordingly the doctrine these cases adopt should apply to s. 70B(2).

Section 21(1) does not in our view apply to this case. As Hill J said in Energy Resources, the distinction the section draws is between payment in cash and payment in kind. We do not think ``cash'' is restricted to coins and notes (local or foreign). In our view the phrase ``consideration... otherwise than in cash'' points to a consideration that does not find expression in cash. The consideration in the present case is a promise to pay money. That is not a consideration in kind, and although it is not actually money, it sounds in money. The company shares considered in Case 88 and Energy Resources are in our view different from the bonds. Shares are not, and do not involve, a promise to pay money: they do not find expression in cash or sound in money. When shares are the consideration for another's promise, they are as much a consideration in kind as a bag of wheat or a horse. Abrahams, Gold Coast and Case 88 were concerned with the value to be placed upon shares, and the willing and not anxious purchaser doctrine they espouse may well be relevant to the determination of the money value of ``in kind'' consideration in cases to which s. 21 applies. But those cases are not applicable to s. 70B, which is not concerned with ``value'' but with ``loss'' in the sense in which that word is used in the Act in relation to deductions. Indeed we did not understand the applicant to rely upon them in connection with s. 70B. Rather they were prayed in aid on the assumption that s. 21 applied.

Questions answered

The questions should be answered as follows:

Question 1 - No.

Question 2 - According to the face value of the bonds.

Question 3 - This question does not arise.

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