Case C41

Judges: FE Dubout Ch
G Thompson M

N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 25 June 1971.

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N. Dempsey (Member): The taxpayer concerned in this reference is a Private Company engaged in building operations. Its activities are largely concentrated on building and developing properties it then disposes of by sale.

2. In August, 1963, it acquired certain land and commenced to build thereon. The completed building and land were sold in April, 1965 for $160,000 payable by way of deposit $16,000, $64,000 on completion of sale and the balance $80,000 was secured by a mortgage.

3. The amount due under the mortgage was repayable at the expiration of five years but could be repaid after one year. Interest at 8% per annum was payable whilst any moneys were unpaid.

4. Having disposed of this property the company commenced a further development on land acquired about June, 1966. It found itself short of finance to complete this project, and it took steps to realise on the amount due to it on the previous project which, as has been stated, was secured by a mortgage.

5. After negotiations, it disposed of its equity in the mortgage for $73,100 thereby incurring a loss of $6,900. It claimed this amount as a deduction in its return for the year in which the transaction took place, the year ended 30 June 1968.

6. In the return, the claim was based on a consideration that the amount represented an expense in acquiring finance to construct an income producing property. The claim being disallowed, an objection was lodged which claimed inter alia ``In our opinion this claim represents a loss necessarily incurred in earning income and should be an allowable deduction under sec. 51 of the Income Tax Assessment Act. ''

7. The objection having been disallowed, the matter has been referred to the Board.

8. There is no dispute between parties as to the facts which are as set out.

9. The sole point at issue is whether the loss incurred in discounting the mortgage is a loss or outgoing incurred in carrying on a business not being a loss of a capital nature.

10. Board of Review No. 1 in a decision reported in
16 T.B.R.D. Case R.83 p. 418, dealt with a claim for a loss on the sale of debentures accepted in settlement of a trading debt. In that case, the taxpayer claimed it was entitled to a deduction under sec. 63(1) as a bad debt or alternatively under sec. 51(1) as a loss incurred in carrying on a business not being a loss of a capital nature. The Board by majority, Mr. O'Neill dissenting, upheld the decision of the Commissioner that the objection should be disallowed.

11. In this decision the members of the Board have set out very clearly what I consider are the relevant matters to be considered and have referred to the various cases relied on to support their respective views.

12. I think, from the cases referred to and the decisions relied on, there emerges a fairly clear pattern. In my view the pattern established is that if a trading debt is satisfied by accepting, in lieu of cash, some other forms of consideration such as land, shares, debentures etc. then the value which was placed on such item at that time is to be regarded as the amount received in payment of the debt. If the value be lower than the debt, then the balance under appropriate circumstances may be correctly claimed as a deduction under sec. 63(1) as a bad debt.

13. However, once some asset is accepted in settlement of the debt, then the debt is extinguished and its place is taken by the asset. If this asset is subsequently sold and does not realise the value placed on it at the time of its acceptance in settlement of the trading debt, then the loss sustained is a loss of capital and as such is not allowable under sec. 51(1). This seems to me to be the basis of the majority decision in 16 T.B.R.D. case R.83, supra.

14. However, this is not the situation with which the Board has to deal with in this case. When taxpayer signed the Contract of Sale as vendor of the property, he received by way of deposit and a subsequent payment $80,000 and the balance of the consideration due to him, viz: $80,000 was secured to him by a mortgage.

15. As I understand it, the implications of this are not that he has received payment in full of the consideration and has then loaned $80,000 at interest to the purchaser but that he has a debt owing to him of $80,000. In terms of the mortgage he is to be paid interest on this sum and the principal is to be paid within a given time.

16. The granting of this mortgage in no way extinguishes the original debt and in no way alters its character. It merely affords the purchaser time to pay his debt and secures to the vendor that he will be in a position, if necessary, to take appropriate steps to secure and enforce payment.

17. The position then is, as I see it, that taxpayer, being in need of funds decided to discount his trading debt by accepting a lesser sum. That he accepted this lesser sum from a third party and not from his debtor does not appear to me to have any bearing on the matter.

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ATC 185

18. It is not at all uncommon for traders to sell their debts for less than face value or to grant discounts or rebates for prompt payment. As was stated by the late Fullager J. in
Ballarat Brewing Co. Ltd. v. F. C. of T. 82 C.L.R. p. 364 at page 366 ``The Commissioner does not contend, and plainly could not contend, that discount and rebates are not to be brought into account for the purpose of arriving at gross profit.''

19. I would therefore find that the loss sustained when the mortgage was discounted was a loss incurred in carrying on the business, that it was not a loss a capital nature, but of a revenue nature and that it is properly allowable as a deduction under sec. 51(1).

20. I therefore allow the objection in full and direct that the assessment for the year ended 30 June 1968, be amended and reduced by $6,900.

Claim allowed