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Subject: Bad Debts

Question 1

Is the amount of $JM written off as a bad debt by the trustee of the X Trust allowable as a deduction under either section 25-35 or section 8-1, or both, of the Income Tax Assessment Act 1997(ITAA 1997) in the year ended 30 June 2011?

Answer

Yes, under section 25-35 of the ITAA 1997.

As a deduction is allowed under section 25-35 of the ITAA 1997 it is unnecessary to also determine whether a deduction would also be allowable under section 8-1 of the ITAA 1997.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

July 2010

Relevant facts and circumstances

The X Trust was established as a discretionary trust.

The trustee of the X Trust is the X Trustee.

The X Trustee made a valid family trust election in the 2000 calendar year which has not been revoked.

Y Trust is a unit trust.

The X Trust acquired the majority of the units in the Y Trust.

The X Trust provided loans to the Y Trust during the financial years 2003 to 2006 inclusive. The X Trust derived loan interest in those financial years from the loans to the Y Trust.

The amount of loan interest to be charged for each of the above income years was determined by way of oral agreement between the parties.

However, although loan interest was charged in each of the above income years no actual payment of that loan interest was made by the Y Trust to the X Trust.

In a letter, in July 2001, from the X Trustee to the Trustee of the Y Trust (Y Trustee) the terms of the loan arrangements between the X Trust and the Y Trust were set out.

The Y Trust traded at a loss in most of the years from 2003 onwards and called upon the X Trust as its main unit holder to fund losses and working capital requirements.

In 2009 the Y Trust agreed to execute a Deed of Equitable Charge in favour of the X Trust to secure further advances as well as outstanding loan amounts provided by the X Trust to the Y Trust. This Deed of Equitable Charge was duly registered by ASIC.

By 30 June 2010 the total amount of loans and interest outstanding by the Y Trust in favour of the X Trust amounted to $JM. The part loan repayments which occurred in the financial years 2004, 2005 and 2010 were on account of loan principal only and not on account of loan interest.

At a meeting, held in July 2010, of the Board of Directors of the X Trustee it was resolved to write off as a bad debt the sum of $KM including the $JM loan interest charged but unpaid in respect of the financial years 2003 to 2006 inclusive.

Following continuing and mounting losses by the Y Trust, the X Trust negotiated the sale of its units in the Y Trust in a management buy-out arrangement under a sale agreement in 2011.

Under the terms of the sale agreement some of the outstanding loans were forgiven in 2011 but not all amounts were to be forgiven until certain refinancing occurred by the Y Trust in the financial year commencing 1 July 2011. The refinancing did occur in July 2011 enabling the agreement for sale to be fully completed subject to those covenants which remain outstanding and are in the nature of warranties.

A Deed of Release and Amendment was also effected in 2011 and under its terms both the outstanding loan principal and the outstanding loan interest were to be progressively extinguished during the 2011 and 2012 financial years.

The X Trust had returned the interest derived from the loans to the Y Trust as assessable income in its trust tax returns for the financial years 2003 to 2006 inclusive.

X Trust interest returned income years 2003 to 2006 inclusive was declared

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-35

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Whether a deduction is available under section 25-35?

1. Section 25-35 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for debts that have become bad and which are, subsequently, written off. Section 25-35 of the ITAA 1997 states:

SECTION 25-35 Bad debts

25-35(1)

You can deduct a debt (or part of a debt) that you write off as bad in the income year if:

(a) it was included in your assessable income for the income year or for an earlier income year; or

History

S 25-35(4C) repealed by No 79 of 2010, s 3 and Sch 3 item 10, effective 1 July 2010. S 25-35(4C) formerly read:

25-35(4C) An expression (except car) has the same meaning in subsection (4A) or (4B) as in Division 42A of Schedule 2E to the Income Tax Assessment Act 1936.

S 25-35(4C) inserted by No 174 of 1997

Special rules affecting deductions under this section

25-35(5)

The rules described in the table may affect your entitlement to deductions under this section, or may result in a deduction being reversed.

Provisions of the Income Tax Assessment Act 1997 are identified in normal text. The other provisions, in bold, are provisions of the Income Tax Assessment Act 1936.

Certain trusts cannot deduct a bad debt if there has been a change in ownership or control or an abnormal trading in their units Divisions 266 and 267 in Schedule 2F

2. Therefore, section 25-35 of the ITAA 1997 requires (as relevant here) that:

(a) a debt exists; and

(b) the debt is bad; and

(c) the debt is written off as a bad debt in the income year in which the deduction is claimed; and

(d) the debt was brought to account as assessable income in any year; and

(e) the special rules of subsection 25-35(5) do not deny a deduction.

(a) a debt exists

3. Taxation Ruling TR 92/18 provides guidance when a deduction for bad debts is allowable under former paragraph 63(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936). It is considered that the guidance provided by TR 92/18 is similarly useful when examining whether a claimed deduction for a bad debt is allowable under section 25-35 of the ITAA 1997.

4. Paragraph 25 of TR 92/18 states:

25. A debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 63. There is a debt for the purposes of section 63 where a taxpayer has merely an equitable entitlement to the debt ( G.E. Crane Sales Pty Ltd v. F.C. of T. (1971) 126 CLR 177, 71 ATC 4268, 2 ATR 692).

5. The X Trustee as trustee for the X Trust entered into loan arrangements (Loan Agreement) with Y Trustee as the trustee of the Y Trust in 2001.

6. Under the terms of the Loan Agreement, the Y Trust was to pay the X Trust interest on the amounts loaned by the X Trust to the Y Trust. However, such interest was to not to accrue day by day but was to be determined from time to time by any agreement, either written or oral, between the parties.

7. Also, under the terms of the Loan Agreement, should there be the absence of any such mutual agreement at any particular time between the parties then interest became due and payable as and when determined by the X Trust.

8. Further, under the terms of the Loan Agreement, interest payable was to be applied to the Y Trust's outstanding loan account in the books of the X Trust. The amounts of loan interest for each of the relevant income years was done by way of an oral agreement between the parties.

9. The loan interest amounts agreed upon between the X Trust and the Y Trust were entered into the account books of the X Trust but those interest amounts were not actually paid by the Y Trust in the relevant income years.

10. The X Trustee ATF entered into a Unit Holders Agreement, whereby the X Trust (amongst other unit holders in the Y Trust) agreed to loan the Y Trust further funds in proportion to the units the X Trustee held in the Y Trust. Under clause 5.3 of the aforementioned Unit Holders Agreement interest on loan funds was to be paid at the rate of 10% per annum or at such other rate as the parties determine from time to time.

11. The Deed of Fixed and Floating Charge (Equitable Charge) entered into between the Y Trustee and the X Trustee in 2009 offered the X Trust security over certain assets of the Y Trust in relation to loans and advances already made, or about to be made, by the X Trust to the Y Trust. The Loan Agreement of 2001, was included as a collateral document to the equitable charge and amounts due under that Loan Agreement formed part of the 'Secured Money' for which security over the assets of the UBF Trust was offered refereed to then outstanding $KM of loan principal plus loan interest.

12. Part of the sale agreement of 2011, for the sale of shares in the Y Trustee and the sale of the units in the Y Trust, was that a deed of release and amendment (Deed of Release) was also to be executed for the partial release and discharge of the amounts still then owing from the loan to the Y Trust by the X Trust. In subclause 1.1, regarding the 'Definitions', of the deed of release the ' Loan' is defined as the 'loan originally entered into under an agreement of 2001 between the X Trust and the Y Trust' and the 'Debt' is defined as 'the aggregate amount of principal and accrued interest...under the X Trust Loan, which at the date of this deed is $KM'.

13. It is accepted that the relevant terms of the above Loan Agreement, Unit Holders Agreement and Deed of Release demonstrate that in each of the relevant financial years from 2003 to 2011 the Y Trust had continuing outstanding liabilities to repay loan principal and loan interest to the X Trust.

14. It is also accepted, therefore, that for each of the relevant financial years from 2003 to 2011 a continuing debt existed between the Y Trust and the X Trust for loan interest in respect of the 2003 to 2006 financial years inclusive . Consequently, this condition is satisfied.

(b) the debt is bad

15. TR 92/18 also provides the following guidance when a debt may be considered to be 'bad':

26. Whether a debt is bad depends upon an objective consideration of all the relevant circumstances of each case. Strictly speaking , in the case of an individual debtor, a debt is not 'bad' until the debtor has died without assets, or has become insolvent and his estate has been distributed, or the debt has become statute barred. In the case of a corporate debtor a similar situation would arise on receipt of the liquidator's final distribution or when the company is completely wound up.

27. However, because subsection 63(3) contemplates that an amount may subsequently be received in respect of a debt previously written off as bad, it is considered that, for the purposes of section 63, the debt need not necessarily be 'bad' in the strict sense as indicated in paragraph 26 above.

28. In support of the view expressed in paragraph 27, Harvey ACJ in Elder Smith & Co Ltd v. Commissioner of Taxation (NSW) (1931) 1 ATD 241, (affirmed in Elder Smith v. F.C. of T. (1932) 47 CLR 471) considered a similar bad debts provision in the State Income Tax (Management) Act 1928 (NSW). He made an obiter observation that the legislation contemplated a debt being bad where it was 'a conjectural bad debt for the time being' (at p. 242). Similarly, in Anderson and Halstead Ltd v. Birrell (1932) 16 TC 200 Rowlatt J, in considering the English legislative provision for bad debts, said that an 'estimate' was required as to the extent a debt is bad for the purpose of a profit and loss account. Such an estimate he said 'was a valuation of an asset (the debt) upon the facts and probabilities at the time the writing off of the debt takes place'. The Taxation Board of Review in Case 26 (1945) 11 CTBR (OS) 94 also observed at p.94 that '[i]t may happen - although it seems quite improbable - that through some turn of fortune portion of the amount in question will yet be recovered, but any such consideration cannot affect the issue.'

29. As long as the commercial judgment pointing to the relevant facts indicates that a debt is bad for the time being, the debt is accepted as bad for section 63 purposes. It is not essential that a creditor take all legally available steps to recover the debt. What is necessary is that the creditor make a bona fide assessment, based on sound commercial considerations, of the extent to which the debt is bad.

30. Although the debt need not be bad in the strict sense it must nonetheless be more than merely doubtful. For example, a debt will not be accepted as bad merely because a certain set period of time for payment (e.g. 180 days or 270 days) has elapsed with no payment or contact having been made by the debtor.

31. A debt may be considered to have become bad in any of the following circumstances:

(e) where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, is alleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered.

32. While individual cases may vary, as a practical guide a debt will be accepted as bad under category (e) above where, depending on the particular facts of the case, a taxpayer has taken the appropriate steps in an attempt to recover the debt and not simply written it off as bad. Generally speaking such steps would include some or all of the following, although the steps undertaken will vary depending upon the size of the debt and the resources available to the creditor to pursue the debt:

(i) reminder notices issued and telephone/mail contact is attempted;

(ii) a reasonable period of time has elapsed since the original due date for payment of the debt. This will of necessity vary depending upon the amount of the debt outstanding and the taxpayers' credit arrangements (e.g. 90, 120 or 150 days overdue);

(iii) formal demand notice is served;

(iv) issue of, and service of, a summons;

(v) judgment entered against the delinquent debtor;

(vi) execution proceedings to enforce judgment;

(vii) the calculation and charging of interest is ceased and the account is closed, (a tracing file may be kept open; also, in the case of a partial debt write-off, the account may remain open);

(viii) valuation of any security held against the debt;

(ix) sale of any seized or repossessed assets.

While the above factors are indicative of the circumstances in which a debt may be considered bad, ultimately the question is one of fact and will depend on all the facts and circumstances surrounding the transactions. All pertinent evidence including the value of collateral securing the debt and the financial condition of the debtor should be considered. Ultimately, the taxpayer is responsible for establishing that a debt is bad and bears the onus of proof in this regard.

16. The X Trustee does not appear to have taken any or all of the actions contemplated in paragraph 32 of TR 92/18 as being indicative of circumstances in which a debt may be considered to be bad.

17. Nevertheless, the X Trustee did recite in the minutes of the meeting of its Directors, held in 2010, several factors taken into account by the X Trustee in determining the interest debt was bad. These factors included (a) a large deficiency in the worth of the Y Trust assets, (b) Y Trust liabilities exceeding tangible assets by a large amount, (c) that meetings held between the directors of the X Trustee and the independent directors of the Y Trustee indicated that the future financial prospects of the Y Trust were rapidly deteriorating and (d) that in view of the current financial position of the Y Trust and the existence of a first charge held by the banks against Y Trust assets any legal action at that time to pursue the debt would be uneconomical and of no benefit.

18. In view of the above it is considered that the X Trustee made a bona fide assessment, based on sound commercial considerations, that the relevant loan interest debt was bad.

19. The Deed of Release, effected in 2011, detailed various arrangements between the X Trust and the Y Trust for the forgiveness of part of the loan, the application of a set off amount and the initialisation of a repayment scheme which overall would have the result of progressively extinguishing both the outstanding loan principal and also the outstanding loan interest. However, as pointed out in paragraph 29 of TR 92/18 '[a]s long as the commercial judgment pointing to the relevant facts indicates that a debt is bad for the time being (emphasis added), the debt is accepted as bad for section 63 purposes...'

20. It is considered that in the overall circumstances the relevant interest debt should be treated as being bad for the purposes of section 25-35 of the ITAA 1997. It is also considered that this view is not altered by the fact that the X Trustee determined not to take all the steps legally available to it at the time of the relevant director's meeting nor the fact that arrangements were subsequently entered into that would eventually wholly extinguish the loan interest debt.

21. This condition is satisfied.

(c) the debt is written off as a bad debt in the relevant income year

22. TR 92/18 provides the following guidance when a debt may be considered to be 'written off' in the relevant income year:

34. It is not enough to simply make a provision for a bad debt. The debt has to be written off as a bad debt and it has to be written off before year's end. The question has often arisen as to what the term 'written off' means. In Case 33 (1941) 10 TBRD 101 the Taxation Board of Review expressed at p.103 the view that:

'... the writing off of a bad debt does not necessitate a particular form of book entry or even a book entry at all. It is sufficient, we think, if there are written particulars - there must, of course, be something in writing - which indicates that the creditor has treated the debt as bad.'

35. There is a requirement that the debt has to be physically written off. Note the following relevant comments of the Chairman of the Taxation Board of Review in Case 28 (1947) 13 TBRD 223 at p.239:

'"Bad debts written off as such in the year of income": I am unable to share the view that the condition denoted by these words can be satisfied where, in respect of a debt owed to the taxpayer concerned, there is no evidence whatever that anything was put in writing, in the year of income, from which it could be gathered that the taxpayer intended to treat the debt as bad. The words are plain and positive and they are so clearly objective that their very purpose seems to me to be to put the onus upon any taxpayer who seeks to obtain the benefit provided by the section to prove (if so required) by sufficient evidence that there was a physical writing off of the debt in the year of income...

36. The requirements of section 63 may be satisfied even though a debt is not written off in the books of account , for example, section 63 will still be satisfied in the following circumstances:

(a) a Board meeting authorises the writing off of a debt and there is a physical recording of the written particulars of the debt and Board's decision before year end but the writing off of the debt in the taxpayer's books of account occurs subsequent to year end;

(b) a written recommendation by the financial controller to write off a debt which is agreed to by the managing director in writing prior to year end followed by a physical writing off in the books of account subsequent to year end.

37. ...

38. Furthermore, it is essential that a debt be in existence in order that it may be written off as bad. Point v. F.C. of T. (supra) also demonstrates that a debt cannot be written off after it has been settled, compromised, otherwise extinguished or assigned. In that case, the taxpayer released a debtor from a debt under a scheme of arrangement in the 1964 income year. In the following income year the taxpayer purported to write off the debt as bad under section 63. Owen J held that at the time of the purported writing off there was simply no debt in existence because it had been extinguished in the previous income year. A similar conclusion was reached in Franklin's Selfserve Pty Ltd v. F.C. of T. (1970) 125 CLR 52, 70 ATC 4079, 1 ATR 673 and G.E. Crane Sales Pty Ltd v. F.C. of T. (supra). Therefore, once a debt has been settled, compromised, otherwise extinguished or assigned no further amounts can be claimed as bad debts for the purposes of section 63. This principle equally applies where the extinguishment of the debt and the writing off of the debt occur in the same financial year. If the writing-off of the debt occurred after the extinguishment or the disposal of the debt, no deduction is allowable under section 63. It is, therefore, important that a creditor should not delay the writing-off process until after the debt is extinguished.

39. The mere writing-off of a debt does not necessarily relieve the debtor from ever having to pay the liability. If the financial position of the debtor subsequently improves or the circumstances which led to the debt being written off alter, action may be taken to collect the debt. However, no amount is to be treated as assessable income under subsection 63(3) until such time as the debt (or part of it) is recovered.

23. Resolutions were made by the directors of the X Trustee, at their meeting held in 2010, that the $JM total loan interest charged but unpaid by the Y Trust should be written off as a bad debt and that the company's accountant be instructed to make the relevant bad debt entry in the books of the X Trust on that date.

24. The above resolutions were made in the 2011 income year and this is the income year for which the ruling is requested.

25. However, as already referred to above, the Deed of Release, effected in 2011, detailed various arrangements between the X Trust and the Y Trust for the forgiveness of part of the loan, the application of a set off amount and the initialisation of a repayment scheme which overall would have the result of progressively extinguishing both the outstanding loan principal and also the outstanding loan interest.

26. Under the terms of the Deed of Release the then outstanding debt of $KM was to be reduced by a set off amount of $FM and a forgiven amount of $GM effective from 2011. Also under the terms of the Deed of Release a further $GM ('Tranche 1') was to be paid in reduction of the residual debt by 30 June 2011 (leaving the remaining amount of $LM ('Tranche 2') to be paid by 31 July 2011 or 31 August 2011).

27. Nonetheless, in line with the principles explained by paragraph 38 of TR 92/18 above, paragraph 15 of TR 92/18 advises that 'no bad debt deduction is allowable...unless the bad debt is written off before the debt is extinguished'.

28. It is considered, therefore, that although there was a reduction of the total outstanding debt effected during the 2011 income year this fact, alone, does not necessarily prevent the relevant debt being considered as being validly written off for the purposes of section 25-35 of the ITAA 1997 given that the date of the X Trustee's directors meeting preceded the effective date of the terms of the Deed of Release.

29. However, under the terms of the Deed of Release there was an undissected reduction in the total outstanding loan principal plus loan interest which exceeded the amount of the loan interest debt (that is, the total loan interest debt was $JM but there was an overall reduction of the total debt by $MM effected by 30 June 2011 leaving $LM remaining). As also explained in paragraph 38 of TR 92/18 above, it is essential that a debt be in existence in order that it may be written off as bad and that this principle equally applies where the extinguishment of the debt and the writing off of the debt occur in the same financial year.

30. It is noted that in the 2003, 2005 and 2010 income years reductions in the outstanding loan amounts also occurred and that in each of those occasions the reductions were applied by the X Trust against the loan principal outstanding and were not applied to the loan interest outstanding. It is considered that the reduction of the total debt that occurred during the 2011 income year should be accepted, in the absence of any evidence to the contrary, as being similarly a reduction of the loan principal only and with no reduction of the outstanding loan interest.

31. It is considered that in view of the above resolutions in July 2010 by the directors of the X Trustee that there was a write off of the relevant loan interest as a bad debt in the 2011 income year and, therefore, this condition is satisfied. It is also considered that this view is not altered by the fact that reductions of the total amount of loan principal and loan interest subsequently occurred during the same income year.

(d) the debt was brought to account as assessable income in any year

32. TR 92/18 provides the following guidance when a debt may be considered to be 'brought to account as assessable income':

40. The requirement of paragraph 63(1)(a) that the debt was previously brought to account as assessable income presupposes a non-cash basis of returning income for tax purposes. For a taxpayer who operates on a cash receipts basis and lodges returns of income on that basis the taxpayer is not entitled to a deduction for bad debts...

33. The X Trust operates a non-cash basis for returning income for income tax purposes.

34. The X Trust returned various amounts of interest

35. Therefore, in the income years 2003 to 2006 inclusive the X Trust returned $JM total interest in relation to the Y Trust. This is the same as the total amount of the loan interest debt in respect of the Y Trust resolved to be written off as a bad debt by the Directors of the X Trustee at their meeting in July 2010.

36. It is considered that in view of the above this condition is met.

(e) special rules of subsection 25-35(5)

37. Item 4 of subsection 25-35(5) of the ITAA 1997 states that if an amount was received as a recoupment of a bad debt that is deductible under that section then the recouped amount may be included in assessable income.

38. As explained previously, under the terms of the Deed of Release there was an undissected reduction in the total outstanding loan principal plus loan interest which far exceeded the amount of the loan interest debt and that such was reduction was effected in the 2011 income year. However, as determined above, such reduction is accepted as being a reduction of the loan principal only and not a reduction of the outstanding loan interest.

39. Therefore, as the relevant amount recouped was not in respect of a bad debt, Item 4 of subsection 25-35 does not apply to deny a deduction in the 2011 income year (however, it may be noted that since loan interest outstanding must have been fully repaid in July 2011 this will mean that the amount of the loan interest allowed as a deduction as a bad debt in the 2011 income year must be brought to account as assessable income in the 2012 income year under the provisions of Subdivision 20-A of the ITAA 1997).

40. Item 5 of subsection 25-35(5) of the ITAA 1997 states that certain trusts cannot deduct a bad debt if there has been a change in ownership or control or an abnormal trading in their units. The relevant associated legislation is to be found in Divisions 266 and 267 in Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).

41. Section 272-65 of the ITAA 1936 states that a trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust (and this is similar in effect to the definition of 'fixed trust' in subsection 995-1(1) of the ITAA 1997). Section 272-70 of the ITAA 1936 states that a trust is a non-fixed trust if it is not a fixed trust (and this is similar in wording to the definition of 'non-fixed trust' in subsection 995-1(1) of the ITAA 1997).

42. As the X Trust is a discretionary trust it will be a non-fixed trust for the purposes of subsection 25-35(5) of the ITAA 1997.

43. Under section 267-25 of the ITAA 1936 a non-fixed trust may be denied a debt deduction. Section 267-25 of the ITAA 1936 states:

SECTION 267-25 NON-FIXED TRUST MAY BE DENIED DEBT DEDUCTION

Type of trust to which this section applies

267-25(1)

This section applies to a trust that:

(a) can deduct in the income year an amount:

(i) under...section 8-1 or 25-35 of the Income Tax Assessment Act 1997, in respect of the writing off of the whole or part of a debt, incurred in an earlier income year, as bad; or

(ii) ...and

(b) was a non-fixed trust at any time in the period (the test period) beginning on the day the debt was incurred and ending at the end of the income year; and

(c) was not an excepted trust at all times in the test period.

History

S 267-25(1) amended by No 162 of 2005 and No 41 of 2005

44. Paragraph 267-25(1)(c) of the ITAA 1936 requires that the relevant trust not be an 'excepted trust' at all times in the test period. Paragraph 272-100(a) of the ITAA 1936 states that a trust is an 'excepted trust' if 'it is a family trust at the particular time'.

45. Section 272-75 of the ITAA 1936 states that a trust is a family trust at any time when a family trust election in respect of the trust is in force.

46. Any debts arising from the loan interest due to the X Trust from the Y Trust arose sometime during the income years 2003, 2004, 2005 and 2006. As the relevant family trust election for the X Trust was made with effect from the 2000 income year and has not been revoked this means that the X Trust was an excepted trust for the test period for the purposes of paragraph 267-25(1)(c) of the ITAA 1936.

47. Therefore, Item 5 of subsection 25-35 does not apply to deny a deduction in the 2011 income year.

Conclusion on the application of subsection 25-25(5)

48. Neither Item 4 nor Item 5 of subsection25-25(5) precludes a deduction for bad debts in respect of the outstanding loan interest.

49. Consequently, subsection 25-35(5) of the ITAA 1997 does not deny a deduction for the relevant bad debt in respect of the outstanding loan interest..

Conclusion on the application of section 25-35

50. The bad debt of $JM in relation to unpaid loan interest is allowable as a deduction under section 25-35 of the ITAA 1997 as all the necessary conditions of that aforementioned section have been satisfied.

Whether a deduction is available under section 8-1?

51. TR 92/18 provides the following guidance regarding the application of section 51 of the ITAA 1936 (analogous to section 8-1 of the ITAA 1997) to deductions for bad debts:

10. Certain taxpayers who fail to satisfy the requirements under section 63 [analogous to section 25-35 of the ITAA 1997] may be entitled to a bad debt deduction under subsection 51(1). Any business losses or outgoings of a revenue nature are an allowable deduction under subsection 51(1) when incurred. Whether or not a loss occasioned by a bad debt is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case.

11. A loss occasioned by a bad debt is clearly incurred when the loan is disposed of, settled, compromised or otherwise extinguished. Where a debt is not disposed of, settled, compromised or otherwise extinguished, it is accepted that the loss of the debt is incurred under subsection 51(1) when it is written off as bad in the same way as in section 63.

52. As it has been determined above that a bad debt of $JM in relation to unpaid loan interest is allowable as a deduction under section 25-35 of the ITAA 1997 it is considered that it is unnecessary in this particular instance to also consider further whether a deduction would also be allowable under section 8-1 of the ITAA 1997.

Conclusion on the application of section 8-1

Not necessary to determine.