Gunaleela v Minister for Immigration and Ethnic Affairs

[1987] FCA 277

INCOME TAX - deductions - money on short-term loan with failed

financial institution written off a5 a bad debt - whether a loss on revenue or capital account - whether taxpayer in the business of the lending of money.

Income Tax Assessment Act 1936 (Cth), ss.51(1), 63(l)(b)

4 June 1987
DOWEN C. J. , JENKINSON J.	BURCHFPT J
ADELAIDE
IN THE	COURT OF AUSTRALIA )

)

SOUTH AUSTRALIA DISTRICT REGISTRY ) No. G47 of 1986

)

GENERAL DIVISION )

ON APPEAL FROM THE SUPFG2-E COURT OF SOUTH AUSTRALIA

BEXWEN:

COMMISSIONER OF TAXATION

- and -

MARSHALL AND BROUGHAH PTY

LIMITED

M: Bowen C.J.,	Jenkinson and Burchett JJ.
W: Sydney
m:	4 June 1987

MINUTE OF ORDERS

THE COURT ORDERS THAT:

The appeal be dismissed with costs.

NOTE: Settlement and entry of orders is dealt with in Order 36
of the Federal Court Rules.

?

IN THE FEDERAL COURT OF AUSTRACIA 1

)

SOUM AUSTRALIA DISTRICT RWISTRY ) No. G47 of 1986

)

FnsERAG DIVISION )

ON APPEAL F R O M THE SUPREHE COURT OF SOUTH AUSTRALIA

BEzwEm:

COMMISSIONER OF TAXATION

- and -

MARSHALL AND BROUGHAM P"

LIMITED

m r Bowen C.J., Jenkinson and Burchett JJ.

WZ:  4 June 1987

R W O N S FOR JUDGMENT

C.J. : The dispute between the Commissioner of Taxation (the Commissioner) and Marshall and Brougham Pty Limited (the taxpayer) is whether the taxpayer is entitled to deduct the sum of $500,000 from its assessable income for the year of income ended 30 June 1979.

The Commissioner issued a notice of assessment on 17

April 1980 disallowing the deduction. The taxpayer objected and

the Commlssioner disallowed the objection. The taxpayer thereupon requested the decision to be referred to the Board of Review for review. The matter was heard by Taxation Board of No. 1 and a decision given on 31 July 1985 confirming the Commissioner's assessment. The taxpayer then appealed to the

Supreme Court of South Australia. The appeal came on for

hearing before Jacobs J. who gave judgment on 11 August 1986 allowing the appeal upon the ground that the taxpayer was entitled to deduct the sum in question under s.Sl(l) of the Jncome Tax Assessment Act 1936 (Cth) (the Act). His Honour rejected another ground advanced by the taxpayer in support of

its claim for a deduction under s.63 of the Act.

The Commissioner applied for and was on 7 November 1986
granted leave to appeal to this Court from the decision of the

Supreme Court of South Australia. An order was made staying the

execution of the judgment until the hearing and determination	of
the appeal or further order.	A Notice of Appeal was duly filed
challenging the correctness of the decision based on 9.51 of	the

Act. Subsequently a Notice of Cross Contention was filed by the

taxpayer challenging the correctness of the decision of the

Supreme Court on s.63 of the Act.

The statement of the somewhat complex facts which

appears in the reasons for judgment of the learned trial judge is

succinct. It was not challenged by either party. It will be

convenient to adopt it. His Honour said -

“The evidence discloses that the business of the

taxpayer company began in a small way as a

partnership business in the building and construction industry in 1948. The taxpayer company was formed in 1954 to acquire the business of the partnership and the business thereafter prospered and expanded. Over the years it assumed a different structure in legal and financial

.

3.

terms. so that by 1974 the business was being

carried on by a group of companies. The taxpayer

company was	the management company within	the
group. It entered	into building contracts	and

engaged sub-contractors.	It employed or engaged
estimators or quantity	surveyors for the purpose

of preparing and submitting tenders for

construction projects, and carried the overhead

costs of the group. It charged management fees to

other companies in the group. They were identified as (1) Marshall and Brougham -Joiners

Pty. Ltd. which	specialised in joinery work, and
sub-contracted to the taxpayer company as well	as

to olther builders outside the group; ( 2 )

Marshall and Brougham Constructions Pty. Ltd.

which employed the building construction workforce
used by the group and appears to have been 'the
construction company' used in the performance of
head-contracts entered into by the taxpayer; ( 3 )
Marshall and Brougham Homes Pty. Ltd. was, as its
name indicated. a home building company within the

group engaged in building project homes, i.e. not

custom built, for sale as a 'package', home

building being	but one facet of the group's
business which, by	this stage, also embraced the

construction of large public and commercial

buildings in the city and	suburbs; (4) Maisbury
Plumbers Pty. Ltd.	was a plumbing sub-contractor

to the group, as well as to other builders; (5)

the remaining effective company in the group - there was one other formed for a specific project which never became operative - was Builders

Supplies Pty. Ltd. The evidence about that

company is sparse but its name implies that	it was
the purchaser and	supplier of building materials

used by the group companies in their various
building projects.

In 1974 Mr Stewart Marshall, a son of one of the founders of the group, was appointed to the

He was a qualified accountant with a university	position of corporate accountant for the group.
degree in economics and working experience in the building industry. One of his first tasks was to reorganise and improve the group's cash flow by a more prompt and regular procedure for charging work in progress and collecting progress payments. The form of head contract in use entitled the taxpayer to make a claim for progress payments at specified stages and, under Hr Marshall's
management, progress payments under the head
contract were often received in advance of the
time at which payments had to be made, whether to sub-contractors engaged to carry out the work,

.

4 .

many of whom were outside the taxpayer's own group
of companies, or to discharge other trading debts.
This time leg meant that the taxpayer had liquid

cash resources, earmarked or destined for payment

to sub-contractors or to	discharge other current
liabilities within the group. Rather	than hold

these monies in the taxpayer's bank account, Hr Marshall, who had later become Finance Director of the taxpayer company and the group as a whole, placed the funds on short-term loan with approved

financial institutions for periods as short as one

or two days or as long as several weeks, depending
upon when the sub-contractors or suppliers of
goods had to be paid. One of the institutions
approved by the Board of Directors of the taxpayer

company with which money could be so placed by way

of deposit on loan, with a limit of Q500 .000 . was

Associated Securities Ltd. (A.S.L.).

There was undisputed evidence from Hr Hansen, the

financial controller of another large consortium

of building contractors, the Fricker Carrington Group, that the way in which the taxpayer managed its funds was common practice in the industry, and

that indeed some contractors went so far as to

allow for an estimated	return on funds so
deposited by way of	short-term loan in assessing

or calculating their	p ofit	margin	before
submitting a tender.

It is part of the taxpayer's case that these funds were received as the taxpayer's revenue, that they

never assumed the character of capital, but were

simply monies in transit, the balance of which, after payment In due course to sub-contractors or other creditors, would be accounted for In the gross profit of the group companies other than the taxpayer itself. That is because the taxpayer, in

addition to or as part of its role as the

management company, was also the 'banker' to the
group. It	maintained the only creditors' ledger,

paid all accounts, and received	all	progress
payments,	and, although the building or	head

contract was in the name of the taxpayer, the

contract was in fact carried out by Constructions

who used other sub-contractors in the group, or
outside sub-contractors, or Its own workforce.
Payments made or monies received on behalf of a
group company such as 'Plumbers' or 'Joiners', are
debited or credited to the loan account of that

company with the taxpayer, but the profit or loss

on any head contract was brought to account In

Constructions and would be reflected in the loan

account of Constructions with the taxpayer.	Thus
progress payments on	a head contract received by

the taxpayer would be credited in the group accounts to Constructions which would in turn be

debited with payments e.g. to sub-contractors

(including other group subcontractors) or suppliers of materials, and the balance, whether a credit or debit balance, was reflected in

Constructions loan account with the taxpayer. At

the close of the financial year in question,

Constructions loan account with the taxpayer was
in credit in an amount of $1,176,199; the
accounts of the other group companies were all in
debit to the taxpayer in a total amount of
$951,130. So far as the taxpayer was concerned
its own profit was derived not from the building
contract into which it enters, but from management
and related charges and interest received from
monies which passed through its hands as 'bankers'
for the group.

The practice of placing current cash balances on short term loan or 'on call' was initiated by Mr

Marshall in June 1975. At first he appears to

have dealt only with Australian International Finance Corporation Ltd. (A.I.F.C.). In the two year period between June 1975 and May 1977 there were some 165 separate transactions with an average of about seven transactions in each month, the highest number of such transactions in any one month during that period being 12. The lowest individual deposit was $25,000 and the highest $425,000, and almost half were in individual amounts of $100,000 or more. If not at call, the repayment date was generally measured in days

although occasionally in weeks. From June 1977

until January 1979 deposit transactions with A.I.F.C. followed the same general pattern but were reduced in number because in the middle of 1977 - so far as the documentary evidence goes,

although Mr I-hrshall thought it was a little

deposits on loan from its current cash receipts	earlier - the taxpayer began to make similar
with Associated Securities Ltd. (A.S.L.) which,
for the most part, offered interest rates that
were marginally higher than those obtained from
A.I.F.C. From June 1977 until January 1979 there were some 35 separate transactions with A.S.L.
spread over the period at an average of about two
per month. About two-thirds of them were for
amounts In excess of $100,000. the highest amount being $300,000 and the lowest $50,000. Again, most of the deposits were at call, or for periods measured in days rather than In weeks. In the period from 1 July 1978 to 31 December 1978, there
were some 16 deposits and 17 repayments, the
current balance fluctuating from time to time between zero and $450,000 (Exhibit G). There is
no reason to doubt that the pattern of
transactions, in and out, as shown by this
exhibit, is typical of the way in which the
taxpayer used both A . I . F . C . and A . S . L . in: dealing
with its current cash resources.
Unfortunately, for the taxpayer A . S . L . was placed
in recelvership on or about 8 February 1979. It
I s common ground that at that date the taxpayer
had $500,000 on 'loan' to A.S.L. for the re-payment of which It ranked as an unsecured
creditor. The amount was never repaid, and on 29 June 1979, i.e. shortly before the close of the
financial year in which the loss had been
incurred, the amount of $500,000 was 'written-off' as a bad debt. Although it does not clearly show
in the accounts which were tendered in evidence,
the undisputed evidence of Mr Marshal1 is that the balance on deposit by way of short-term loan of current cash balances was shown in the annual
accounts as 'cash at bank', the actual amount
shown in that item at the end of the financial
year being the balance struck after 'marrying'
current accounts with the bank (whether in credit or debit) with the amounts payable to the taxpayer
on Its short-term loans. Because such loans were
invariably available at call - even those on short fixed terms by sacrificing interest - they were treated in the accounts as 'cash at bank'.
The 'loss' of $500,000 was written off in the
'Profit and L o s s Statement' of the taxpayer for the relevant accounting period. It converted a
'net profit before extraordinary Item' of
$70,319-82 into a net loss of $429,680-18, which
was carried to a Profit and Loss Appropriation Account as follows:-

9   S

1978   1979

Balance 60202.16 77741.81 1.7.78

900.85 Add over provision

Income Tax 2085.51

16044.00	Less Dividend Paid 19740.00
15143.15	17654.49
32682.8Q Add Profit	( L o s s )

transferred (429680.18)(447334.67) 77741.81 Balance 30.6.79 (369592.86)

The amount by which this account I s now 'overdrawn' ($369,592.86) is carried to the

Balance Sheet as a 'contra' against Shareholders Funds. Had the loss not been incurred, the figure in the Balance Sheet shown under 'Current Assets' as cash at Bank would have been augmented by $500,000, and the Shareholders W d s would have been aumented by unappropriated profits of $130,407114 insteah of shbbing the 'contra' entry of $369,592.86."

I turn now to the questions which were argued on the appeal.

Section 51 ( 1)

Section 51(1) provides:

"All losses and outgoings 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, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt

income. "

In the present appeal it was not in dispute that the

loss fell within the first part of s.51(1). The dispute was

whether it was a loss of capital or a loss of a capital nature.

For the Commissioner it was argued that the money with which the taxpayer was dealing when it invested it on short term

or at call with A.I.F.C. or A.S.L. was money belonging to it. To take the case of a progress payment which it had received, the

taxpayer was the contracting party, it was entitled to receive

the payment and although it had in expectation liabilities which sooner or later it would have to discharge to the particular group company or outside companies to whom all the work had been sub-contracted, it had a short period during which It was in a position to Invest the money to produce Interest. The taxpayer had made appropriate book entries reflecting the right of the relevant group company to receive payment. Subject to eventual adjustment for its management fee and the interest earned on the short term investment of the moneys the taxpayer would be obliged to pay to that company a sum equivalent to the progress payment which It had received.

Counsel for the Commissioner argued that because the

money, which MS the source of the investment with A.S.L..
belonged to the taxpayer. it was Investing a capital asset of its
own and deriving income from the investment for its own purposes.

Reference was made to the statement by Dixon J. in Sun Newspapers

v. Federal Commissioner of Taxation (1938) 61 C.L.R. 337 at

p. 363 as follows:

"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in thls its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and In this and under the former head recurrence may play its part, and (c)

providing a periodical reward or outlay to cover	the means adopted to obtain it; that I s by
its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."

It was argued the character of the advantage sought was the generation of income for the benefit of the taxpayer and the manner in which the advantage was to be used was as Income for the taxpayer's own business. The means adopted were classical

means of the employment of capital.	namely, investment with a
financial institution. When the	loss occurred by the failure of

A.S.L. it was "a loss of or concerning part of the 'profit

yielding subject'" (Charles Moore & Co. (W.A.) Ptv Ltd v. Federal

Commissioner of Taxation (1956) 95 C.L.R. 344 at p.351).

Stating the matter another way it was said that the asset which had been lost had been held for use when needed in the business and was capital in reserve. Reference was made to Guinea Airwavs Ltd v. Federal Commissioner of Taxation (1950) 83 C.L.R.

584 where spare parts in reserve were classified as capital. It followed, so it was said, that the money lost in this case was capital and the loss was a capital loss.

CO~r15el for the Commissioner, when speaking of money

held in reserve by the taxpayer, accepted the position that in the present case what was held was a fluctuating series of individual amounts of money. However, it was argued that together they constituted a "pool" of moneys and this "pool" was available for use as a capital reserve to produce income. I am not sure that the metaphor of the "pool" is particularly helpful.

It suggests certainly a stream of money flowing in and out.
However, it also suggests a false	sense of tranquillity and

permanence, perhaps a pool where trout may play or be played.

The facts disclose rather a continuous flowing stream which was

utilized notwithstanding its movement.

As I understood the argument for the Commissioner, if

the taxpayer had simply left the money in a bank account until such time as it was required for payment to the relevant company it would at111 have constituted capital in reserve. If the bank

had failed. the consequent loss would have been a loss of capital

even in these circumstances. The same conclusion apparently

would follow if It had been deposited in a bank which paid interest upon its accounts. It was submitted that it was an even stronger case of loss of capital where the taxpayer had

actually used the money in reserve by way of depositing it on short term deposit with a financial institution in order to earn

interest. This it was said was a particularly marked diversion

of the money and emphasised that the taxpayer was using its own

capital moneys in reserve for a profit earning purpose.

Counsel for the taxpayer argued that to characterise any
moneys held from time to time In the manner disclosed in the

facts of this case as capital of the taxpayer held in reserve was

to go	too far. In	cases involving losses	as distinct from
outgoings	under	s.Sl(1)	the criteria for characterising a

particular loss as being on revenue account rather than on

capital account are to be found in the object, the character and the circumstances surrounding the moneys or other property which is lost. It is not enough to say that any moneys for the time being held in a bank account or elsewhere pending the discharge of future liabilities is capital in reserve and if lost the loss

represents a loss of capital.

It was submitted that whether a loss occurs by reason of

physical events such as fire, war or robbery or by reason of

financial events such as the insolvency of a borrower of moneys, that which is lost will inevitably be an asset of one kind or another. It is still necessary to determine the character to be given to the asset lost and this will turn upon the source of that which is lost, the object for which it was obtained, the nature or character of the particular asset and the whole of the circumstances surrounding the acquisition and holding of that asset. To be looked at also are the dealings which occur in

assets of that kind in the course of the taxpayer’s business and

the purpose to which whatever	has been lost would have been	put
in the particular case in hand.

It was argued that when dealing with amounts temporarily

placed in the short term money market, the moneys may represent the proceeds of sale of a long term investment asset such as a city building, temporarily held, pending settlement to purchase a

new building. A loss of such moneys as a result of the failure of the taxpayer would, it was said, clearly be a capital loss.

market may be an asset which represents the daily takings of a	It was put that moneys temporarily placed in the short term money
retail shop temporarily on hand pending payment of creditors such as suppliers of goods sold. Loss of these moneys it was said would clearly be a revenue loss.

In the present case moneys were received as progress

payments under building contracts and the whole of these moneys were to be used to meet expenses attributable to the building

contracts. The moneys were held temporarily on account of

sub-contractors, either to pay the sub-contractors themselves, or

to meet the expenses of those sub-contractors. It was said that

moneys were constantly turned over as progress payments were

received and construction expenses were met on a day to day

basis. Thus it was argued when one examined the source of the moneys, the object for which they were obtained, the nature of the business and the circumstances surrounding the placing of the moneys temporarily in this way, the conclusion should be drawn that the moneys lost were properly to be characterised as a loss on revenue account.

There was no serious dispute as to the tests to be

applied. Reference was made to Sun Newspapers Ltd v. Federal Commissioner of Taxation (supra) and to the judgment of Dixon J.

in Hallstroms Ptv Ltd v. Federal Commissioner of Taxation (1946)

72 C.L.R. 634 at pp.646-7. However, the test whether a

particular loss relates to "the profit earning subject" or

relates to "the process of operating it" is not	one which yields
a ready solution when applied	to complex facts such as exist in

the present case. The funds in question are flowing from customers through the business and out to suppliers and workers. A loss has been incurred by the head company, which acts as the

learned trial judge expressed it, as "banker" for the enterprise,

while the moneys were being dealt with by it.

From some aspects the business engaged in by the taxpayer might be regarded as a separate enterprise or a

diversion from its ordinary business, but I think- it is more

truly looked at an a case where income was produced in the course

of the discharge by the taxpayer of its functions as the amnagement company of the group, acting in fact as "banker" for the group. It is necessary to place an interpretation upon what

was done concerning this investment of multiple amounts	from time
to time in the short term money market	with two financial

institutions. It appears to my mind to be more an integral part of the whole business carried on by the taxpayer in its management of the affairs of the group, rather than a separate enterprise or a separate use of capital assets of its m, which should characterise a loss incurred in the process as being a loss of capital or a loss of a capital nature. In the end, I find myself in agreement with the conclusion of the learned trial

judge, and would hold that the loss was	an allowable deduction.
Section 63(l)(b)

I shall now turn to the cross-contention raised by the respondent in this case. It contends that the learned trial judge was in error in holding that the particular sum involved was not deductible as a bad debt under s.63(l)(b) of the Act.

Section 63(l)(b) provides as follows:-

"	(1) Debts which are bad debts and are written off
as such during the year of income, and -
. ..

(b) are in respect of money lent in the ordinary

course of the business of the lending of money

by a taxpayer who carries on that business,

shall be allowable deductions."

It is generally accepted that three conditions must be

satisfied in order to fit the words of s.63(l)(b). First, the

debt must be bad. Second, the debt must be written off as a bad debt during the year of income in respect of which the deduction is claimed. Third, the debt must have been in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer who carries on that business (see Federal

COntIniS6iOner of Taxation v. National Commercial Bankinq

Corporation of Australia Limited (1983) 50 A.L.R. 322 at p.325).

Only the third of these conditions is the subject of dispute between the parties.

In order to satisfy the third condition as stated above the taxpayer must be in the business of lending money at the time

of making the advance in respect of which the deduction is claimed. Further, the advance of the money in question should have been made in the ordinary course of the business of lending money then carried on by it. (See Fairwav Estates Ptv.

- Ltd. v. Federal Commissioner of Taxation (1970) 123 C.L.R. 153).

It is generally accepted that in order to be regarded as

carrying on a business one must demonstrate continuity and system

in one's dealings. In the case of money lending it has been

said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness), (see Litchfield v. Drevfus C19063 1 K.B. 584). It is not decisive whether the lender is a registered money lender or not, although this will be a factor to take into account. It should be

mentioned that it need not be the only business or the principal

business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by

looking at all the circumstances involved (see Newton v. m

(1908) 25 T.L.R. 127).

Turning to the facts of the present case, the taxpayer was in the business of management. It was the manager of a

group of construction companies, concerned with receiving payments in from debtors and paying debts out on behalf of the companies in the group and eventually discharging its own

liability to each group company. On receiving moneys in.

pursuant to head contracts, it would place those moneys on short term loans with two financial institutions until such time as

those funds were required. Although some system and regularity

may be identifiable in these dealings I do not regard them as sufficient to constitute an entirely new business of the lending of money carried on by the taxpayer. In reality the transactions with the finance companies involved must be regarded as sinply part of the business of construction management, just as placing money in the bank is part of any business carried on involving payments in and out in the ordinary course of business. Indeed the management company in this case identified the

transactions in its accounts as "cash at bank".

In the result I am of opinion that the taxpayer was not

in the business of the lending of money and must fail in its

claim under s.63(l)(b). This is not to say. however, that

failing under this section the bad debt involved could not be

regarded as a loss incurred in the ordinary course of the business of the taxpayer. I have stated my conclusions in that regard above.

In my opinion the appeal should be dismissed with costs.

I certify that this and the

preceding fifteen (15) pages are a true copy of the Reasons for Judgment herein of His Honour the Chief Judge,

Sir Nlgel Boven.

/x.gzd& Associate

l/.

Counsel for the Appellant:	Mr M.E.J. Black P.C.
Dr I.J. Hardingham
Solicitors for the Appellant:	Australian Government Solicitor
Counsel for the Respondent:	Mr A.R. Castan P.C.
Mr S.T. O’Loughlin
Solicitors for the Respondent:	O’Loughlin Robertson

JN THE FEDERAL COURT OF AUSTRAL	IA	)
SOUTH AUSTRRLIA DISTRICT REGI	STRY	) No. G47 of 1986

DIVISION )

On appeal from the Supreme Court of South Australia

p-:  ~OMMISSIONER OF TAXATION

Appellant

m: MARSHALL AND BROUGHAM

PTY. LIMITED

Respondent

CORAM :	Bowen C.J., Jenkinaon and Burchett JJ.
DATE:	4 June. 1907

RPASONS FOR JUDGMENT

Jenkinson J.

I agree in the reasons for judgment of Bowen C.J. on

both questions argued in this appeal.

I certify that this page in a true copy of the Reasons for

Judgment herein of the Honourable Mr. Justice Jenkinson.

Associate

Dated: 4 June, 1987

IN THE	FEDERAL	COURT	OF	AUSTRALIA	1
)

SOUTH	AUSTRALIA	DISTRICT	REGISTRY	1	No.	G 47	of 1986
)

DIVISION GENERAL )

ON APPEAL FROM THE SUPREME COURT OF SOUTH AUSTRALIA

BETWEEN:

COMMISSIONER OF

TAXATION

Appellant

MARSHALL AND BROUGHAM

PTY LIMITED

Respondent

CORAM: Bowen C.J., Jenkinson h Burchett JJ.

DATE:  4 June, 1987

REASONS FOR JUDGMENT

BURCHETT J.

I shall not restate the facts which were clearly stated

by the trial Judge in that part of his judgment to which the

Chief Judge has referred. In the view I take of the case, it is

necessary only to extract certain salient features of them. The

respondent taxpayer is the management company of a substantial

group of building construction companies. Although it enters

into construction contracts on behalf of the group, it neither

carries out the constructions nor reaps the profits earned

directly from their performance. What it does is act as the

group's management company, and as its banker. Its profits
consist of management charges and interest earned by the deposit
on loan of monies received by it i n the course of its activities
as "banker" for the group.

The activities which in my view merit the description of banker for the group are certainly ancillary	to and an adjunct of
the company's business of management	of building construction

activities. However they constitute by no means a minor role. The respondent receives progress payments earned by the various other members of the group, which are recorded in their loan

accounts with the respondent, and it makes payments on behalf of other companies in the group for building supplies and to

sub-contractors etc.	These also are recorded	in the loan
accounts of the various companies with the	respondent.	We were

informed that several of the other companies did not maintain separate bank accounts of their own, and that each member of the group treats its loan account with the respondent as a bank account.

A s a result of the efficient collection of progress

payments in advance of the necessity to pay disbursements, such as payments to sub-contractors and payments for materials, there

is commonly a	large (though fluctuating) credit in the loan
accounts of the other companies with the respondent, at least if

the accounts are aggregated, and there are frequently large sums of money available for short periods awaiting disbursement. The

respondent, as has become common practice in the construction

industry, utilizes those moneys, including earnings of its own,

by depositing	sums on short term loan with appropriate finance
companies, repayable on call.	During the period dealt with by

the evidence there was a large number of separate deposits on

loan, for periods normally measured in days, of amounts varying

between $25,000 and $425,000. These deposits on short term loan
were, however, limited to two finance companies, Australian
International Finance Corporation Ltd. and Associated Securities

Ltd.

What led to the present case was the collapse of

Associated Securities Ltd., as a result of which the respondent wrote off the sum of $500,000 as a bad debt, being the outstanding amount it had placed on short term loan with that company and was unable to recover.

I find it impossible to regard the pattern of activity which I have described as other than the carrying on of a business in the nature of banking and money lending. As I have said, it was an adjunct of the respondent’s principal business, but that does not seem to me to affect its proper characterization. In Reid’s Brewery Company, Limited v. Male [l8911 2 Q . B . 1 Pollock B. found no difficulty in regarding a

brewery company as also carrying on an ancillary business of

banking and money lending, limited to the customers and

connections of the brewery.

The nature of a banking business, for relevant purposes,

was sufficiently stated by Viscount Maugham in Punjab

Co-operative Bank, Limited, Amritsar v. Commissloner of

Income-tax, Lahore [l9401 A.C. 1055	at 1072-3. HIS Lordship,
speaking for the Privy	Council, said:

“In the ordinary case	of a bank, the business
consists in its essence	of dealing with money
and credit.	Numerous depositors place their

money with the bank, often receiving a small rate of interest on It. A number of

borrowers receive loans of a large part of

these deposited funds,	at somewhat higher
rates of interest.	But the banker has always
to keep enough cash	or easily realizable

securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very

undesirable to use this econd line of

defence. If,	as in the present case, some of
the securities of the bank are realized	in
order to meet withdrawals	by depositors, it

seems to their Lordships to be quite clear

that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in 'what is truly the carrying on' of the banking business."

The Punjab Co-operative Bank Limited case, and

The Commissioner of Taxation v. The Commercial Banking Co. of

Sydney (1927) 27 S.R.(N.S.W.) 231 were cited by Kitto J. in

Guinea Airways Limited v. Federal Commissioner of Taxation (1950)

83 C.L.R. 584 at 593. Kitto J. commented:

"In the case of a banker, money is his

stock in trade, and any profit or loss he

makes in dealing with money in the course of

his business is on revenue account,

notwithstanding that the money is in a sense

held in reserve."

The Commercial Banking Company case was a decision of the Full

Court of the Supreme Court of New South Wales. In that case, the

bank purchased Government securities in the course of its

business as a banker. At 233 Street C.J. said:

"(I) ts practice has been to purchase such

securities out of funds which were

temporarily unemployed, and to sell them

whenever it was considered advisable to do

so.	In the years	in which it has made a
profit on such sales	it	has treated that

profit as part of its earnings and income; but in the year in question in this case securities of this kind, which were sold in the course of carrying on Its business, were

sold for very much less than they cost. It

claims to deduct the amount so lost on realization as a deduction representing a loss actually incurred by it in the production of its income ... ."

At pp.234-5 he stated that he thought it would be "fallacious to treat what was done in this case as an investment and realization of capital". He said:

"The purchases and sales of Government stock were made, as the special case states, ln the course of carrying on the respondent's business as a bank, and it is manifest that what it did was to invest temporarily, and for purposes of profit, funds which it did not immediately require for other purposes, but which in the course of carrying on its business it might at any time require. In

order that they might not be idle, it

invested them temporarily until they were

required for some other purpose: and in order

that they might be immediately available when
required it invested them in liquid

securities, that is to say, in Government

stock. That, in my opinion, is not an

investment of capital within the meaning	of
the Act in any proper sense of the word.	The

money used was part of the respondent's

stock-in-trade, it was used in an operation of business, and it was used in carrying out the respondent's scheme of profit making as a banker. . . . I think that the temporary

investments made by the respondent bank

cannot be regarded as an investment of capital, and I think that the realization of them from time to time as money was required for other purposes was merely part of its

ordinary business as a banker."

The passage from the judgment of Kitto J. in the Guinea

Airways case which	I have quoted was referred	to In the joint
judgment of Mason, Aickin and Wilson	JJ.	in Avco Financlal
Services	Limited	v. The Commissioner of Taxation of the

Commonwealth of Australia (1982) 150 C.L.R.	510 at 531 as one of
the authorities supporting the statement	that "it has been sald
on a number of occasions that money	is the stock-in-trade of
bankers and money-lenders."	In the Avco Financial Services case

at 5 2 1 the same joint judgment described the finance company's business operation as the turning over of money at a proflt, and

it was on this basis that an exchange loss in respect of ~ t s

borrowing for the purposes of its business, and as an integral

part of that business, was regarded as a revenue loss.	At 518
Gibbs C.J. said:

"Where a taxpayer carries on the business of borrowing and lending money, the moneys used for that purpose are analogous to trading money. stock - the taxpayer in effect deals in the

He went on to say that the exchange losses "were part	of the
price by which the appellant obtained the money	which it used to

make a profit - part of the process by which the appellant obtained regular returns."

Thus in Federal Commissioner of Taxation v. Hunter

Douglas Ltd. (1983) 5 0 A.L.R. 97 at 116 Lockhart J. said:

"Moneys borrowed by a finance company are

turned over by making loans to its customers. Moneys borrowed by a trading company for the purpose of financing the purchase of trading stock are borrowed with a view to disposal of

the stock at a profit. They are, in each

case, part of the	company's	circulating
capital."

In my opinion these statements of the law require the

conclusion that the nature of the business operations conducted

by the respondent was such as to make the loss that was sustained

a revenue loss. The business activity in questlon, though

carried on by a construction company, is at least closely
analogous to banking and money lending. The mere fact that the
respondent is the management company of a group of construction
companies, and earns management fees in that capacity, does not
change the nature of its trading operations with money. Those

operations cannot, in my view, be relevantly distinguished in

principle from the operations discussed in the cases	I have
cited. It is not requisite, in order that a company deal in money so as to make that money its stock	in trade, that it should

describe itself as a bank or as a finance company. The

conclusion follows from the nature of the business operations

performed. Accordingly, I would dismiss the appeal.

The respondent relied, in the alternative, on s.63(1):

"Debts which are bad debts and are written off

as such during the year of	income, and -
...
(b) are in respect	of money lent in the

ordinary course of the business of the

lending of money by a taxpayer who

carries on that business,

shall be allowable deductions."

The learned Judge at first instance considered this section did not afford the respondent relief. He thought it

could not be said that the respondent was "carrying on the
business of money-lending", citing certain cases on the
Money-lenders Acts which assert the proposition that, in effect,
a money-lender is one who holds himself out as willlng to lend to
a wide class of borrowers. Although his Honour did recognize
that cases under the Money-lenders Acts are "coloured by the

penal and sometimes draconian consequences" of a flnding that the

business in question is one of money-lending, it seems to me,
with respect, that he gave insufficient weight to the fact that
they are really exercises in construction of penal statutes.
Those statutes have left a mark on the law of money-lending, but
the stain should not be allowed to spread into the law of income

tax. In Fairway Estates Pty Ltd v. Commissioner of Taxation for

the Commonwealth of Australia (1970) 123	C.L.R. 153 at 163-4,
Barwick C.J.	expressly contrasted the approach taken 1n the

"cases upon the application of legislatlon to control money-lenders" to what is requisite for the carrying on of a money-lending business with the view taken of what is meant by the carrying on of a business "in the application of a taxing statute." (Cf. Federal Commissioner of Taxatlon v. Mercantile

Credits Ltd. (1986) 6 4 A.L.R. 154 at 159.)

To my mind, the money lost by the respondent fell fairly

within the words "money lent in the ordinary course of the

business of the lending of money by a taxpayer who carries	on
that business."	The facts that the loans were short-term and the

borrowers carefully selected do not affect that conclusion. It was not a traditional money-lending business which was involved, but I think the broad language of s.63(1) is capable of accommodating new forms of business which are properly described as the lending of money. The section is in a taxing Act intended to provide for the taxation of business actlvities in the community, which of their nature undergo change and develop new forms. It is necessarily concerned with current activities. In

such an Act, it would be most inappropriate to read the

legislation as	if it were a catalogue confined	to the ways	in
which the kinds	of business to which	it refers happened to	be

structured in the past. If the business of the lending of money

has come to be carried on by persons other than those to whom

previously it may have been limited, and perhaps in new

circumstances, that	is no reason to deny them the benefit of the
sect ion.

I accept that the section was intended to confer a

measure of relief upon "persons carrying on a money lending

business' (Federal Commissioner of Taxation v. National

Commercial Banking Corporation of Australia Limited (1983) 83 ATC

4715 at 47191, but I would not understand those words in any but

their full natural meaning which, I think, comprehends the

business operations conducted by the respondent.

Accordingly, in my opinion the respondent should have

succeeded also under s.63(l)(b).

I	certify that this and the
preceding eight	( 8 ) pages are

a true copy of the Reasons for

Judgment herein of his Honour

Mr. Justice Burchett.

d%2 M. Associate