Point v Federal Commissioner of Taxation

[1970] HCA 7

HIGH COURT OF AUSTRALIA

Owen J.

POINT v. FEDERAL COMMISSIONER OF TAXATION

(1970) 119 CLR 453

18 March 1970

Income Tax (Cth)

Income Tax (Cth)—Allowable deductions—Bad debts—Written off as such during year of income—Statement of account between taxpayer and debtor—Balance struck in favour of taxpayer after set-off of contra debt—Scheme of arrangement between company and creditors—Instrument of release of debt executed by taxpayer pursuant to scheme—Scheme adopted by creditors in one year of income and approved by Court in following year—Released debt written off in taxpayer's books in second year after approval of scheme—Whether deductible—Income Tax Assessment Act 1936-1966 (Cth), s. 63 (1) (a).

Decision

March 18.
OWEN J. delivered the following written judgment:-
I have before me appeals by the appellant taxpayer against decisions of the Board of Review relating to the years ended 30th June 1964, 1965 and 1966 respectively and cross appeals by the Commissioner. The cases raise questions under s. 63 (1) (a) of the Income Tax Assessment Act 1936-1966 (Cth) which, at all relevant times, provided that

"(1) Debts which are bad debts and are written off as such during the year of income, and - (a) have been brought to account by the taxpayer as assessable income of any year ; or (b) . . . shall be allowable deductions."

And by s. 63 (3) :

"(3) Where in the year of income a taxpayer receives an amount in respect of a debt for which a deduction has been allowed to him under this or the previous Act, his assessable income shall include that amount."

In order to take advantage of s. 63 (1) certain conditions must be fulfilled. There must be a debt, that is to say an existing debt, to be written off. It must be a bad debt and it must have been written off as a bad debt during the year of income in respect of which the deduction is claimed and the amounts which go to make up the debt must have been earlier brought to account by the taxpayer as assessable income. In the present case it is not disputed that this last condition was fulfilled. (at p455)

2. The appellant's claim is that for the year ended 30th June 1964 he was entitled to claim a deduction of 109,546 pounds (which I will call X pounds) as being a debt owed to him by a company named White Trucks Pty. Ltd. which had become a bad debt and as such had been written off by him in that year. If that claim was allowed, he would have suffered a loss in that year which would have been carried forward to the following year with the result that in that year he would have had no taxable income. Instead he would have made a loss and that loss carried forward into the next following year would have meant that he would have had no taxable income in that year. In the alternative he claims that if the deduction of X pounds was not allowable for the year ended 30th June 1964, it should be allowed as a deduction in the following year and that in that event he would have suffered a loss in that year which, when carried forward to the following year, would mean that he had no taxable income in the year ended 30th June 1966. (at p455)

3. The Commissioner disallowed each of these claims and on the application of the appellant the matters were referred to the Board of Review. In the result the Board held that under s. 63 of the Act the appellant was entitled to a deduction of 23,304 pounds for the year ended 30th June 1964 with the result that he had suffered a loss during that year and that the amount of that loss when brought forward to the following year pursuant to s. 80 resulted in the reduction of the assessment for that year to nil. The Board went on to confirm the assessment for the year following, that is to say for the year ended 30th June 1966. In arriving at the figure of 23,304 pounds mentioned above the Board, for reasons which it gave, set off against the debt of X pounds owed by White Trucks Pty. Ltd. to the appellant an amount of Y pounds which the appellant owed to White Trucks Pty. Ltd. and set off also certain moneys owed by the appellant to another company (Point Trading Pty. Ltd.) which he had formed and controlled and which had apparently acted as his agent in some of his dealings with White Trucks Pty. Ltd. In the view that I have formed on the questions involved, I have not found it necessary to consider the financial transactions between the appellant, White Trucks Pty. Ltd. and Point Trading Pty. Ltd. (at p456)

4. The conclusions to which I have come differ from those reached by the Board of Review. Stated in summary form I am of opinion that :
(a) Whatever debt was owed by White Trucks Pty. Ltd. (which I will call the company) to the appellant was not written off by the latter as a bad debt during the year ended 30th June 1964, the alleged writing off not taking place until some date after September 1964.
(b) Whatever debt was owed by the company to the appellant as at 30th June 1964 ceased to exist at latest in July 1964. Thereafter there was no debt in existence which could be written off as a bad debt. (at p456)

5. What seem to me to be the relevant facts are as follows : (at p456)

6. White Trucks Pty. Ltd. was a company formed by the appellant many years before 1964 and at all material times he held 25,001 shares in it, the remaining one share being held by a Mr. McIlveney, an accountant in the employ of the company. The appellant and Mr. McIlveney were its directors. In December 1963 the company was in financial difficulties and a provisional liquidator was appointed. On his appointment a statement of the company's affairs, prepared by Mr. McIlveney, was signed by the appellant as a director of the company and presented by him to the provisional liquidator. At that time the appellant's books, which were kept by a firm of accountants, showed the company's indebtedness to him as X pounds and the appellant's indebtedness to the company as a smaller sum (Y pounds), the difference between the two sets of figures being 70,734 pounds 19s. 7d. The statement of affairs, however, contained no reference to either of these sums. What it showed was that the company was indebted to the appellant in the sum of 70,734 pounds 19s. 7d. and the events that followed in which the appellant took part proceeded upon the basis accepted by all concerned that this correctly stated the true financial position as between the company and the appellant. I have no hesitation in inferring that this was so because at some earlier stage the appellant and the company had agreed that the amount of Y pounds owed by the appellant to the company should be set against the amount of X pounds owed by the company to the appellant and that it had been agreed between them, either expressly or impliedly, that the balance of 70,734 pounds 19s. 7d. in the appellant's favour should be regarded as the amount due to him by the company. In other words, the parties had agreed upon an account stated and I use that expression as meaning what Blackburn J. described it to mean in Re Laycock v. Pickles (1863) 4 B &S 497, at p 506 (122 ER 546, at p 549) :

"There is a real account stated . . . when several items of claim are brought into account on either side, and, being set against one another, a balance is struck, and the consideration for the payment of the balance is the discharge of the items on each side. It is then the same as if each item was paid and a discharge given for each, and in consideration of that discharge the balance was agreed to be due . . . It is to be taken as if the sums had been really paid down on each side ; and the balance is recoverable as if money had been really taken in satisfaction. . . ." (at p457)

7. No entries to this effect were, however, made in the appellant's books which, as at 30th June 1964, showed the company as owing the appellant X pounds and the appellant owing the company Y pounds. It appears that during April 1964 the provisional liquidator, no doubt in consultation with the appellant, gave consideration to the preparation of a scheme for submission for the approval of the Equity Court, the purpose of which was to save something out of the wreck for the creditors of the company and eventually find a buyer who might be prepared to pay something for the shares as being shares in what was described in the evidence as a "loss company". These purposes were ultimately achieved. The details of the scheme need not be set out. It is sufficient to say that it involved (inter alia) the release by the appellant of the debt of 70,734 pounds 19s. 7d. owed to him by the company. The appellant was agreeable and on 25th May 1964 he, the company and the provisional liquidator executed a deed by which the appellant agreed with the company and the provisional liquidator "that the company is hereby released from the debts totalling 70,734 pounds 19s. 7d. due by the company to M. V. Point, such release to be effective as from the date" of the Court's approval of the scheme. The proposed scheme was approved by a meeting of creditors held on 22nd June 1964, all the relevant facts including the deed of release being placed before them, and the approval of the Court was given on 27th July 1964. Thereupon the deed of release executed by the appellant became effective and the company's debt to the appellant of 70,734 pounds 19s. 7d. was extinguished. (at p457)

8. Thereafter, at some date between September 1964 and April 1965, a clerk in the firm of accountants who kept the appellant's books made an entry in them, showing the date 30th June 1964, to the effect that the amount of X pounds shown in the books as the company's indebtedness to the appellant was a bad debt and written off as irrecoverable. (at p458)

9. The evidence covered a wide field but in the view that I take of the cases the facts which I have stated seem to me sufficient to dispose of the questions raised. (at p458)

10. I turn first to the appellant's claim to a deduction under s. 63 for the year ended 30th June 1964. For the reasons I have already stated, the amount involved is 70,734 pounds 19s. 7d. and not X pounds. The fact is, however, that during that year neither that nor any other figure was written off by the appellant as a bad debt. The entry purporting to write off X pounds as a bad debt was not made until many months after the end of that year and, in my opinion, the Commissioner rightly refused to apply s. 63. For the appellant, however, it was argued that the words in the section, "written off as such during the year of income", are not to be given what appears to me to be their plain meaning and that the section is sufficiently complied with if the debt is not written off "during the year of income" but at some later date, provided that the writing off relates back to the year of income. I am unable to accept this proposition. "During the year of income" means, in my opinion, "in the course of the year of income". No doubt if a debt is written off as bad after a year of income has passed, it will be allowable as a deduction in the year in which the writing off takes place, provided of course that the other conditions laid down by the section are fulfilled. It was also contended that the execution by the appellant of the deed of release of 25th May 1964 constituted a writing off of the debt then due to the appellant by the company. I cannot agree with this contention. The release was to become effective if and when the Court approved of the scheme and in any case, what the section contemplates is that there is at the time of writing off an existing debt which, so far as can reasonably be foreseen, has become of little or no value. The effect of the release of a debt is to extinguish it, to put an end to its existence and not to reduce the value of it as an asset in the form of a debt owed to the taxpayer. As to the year ended 30th June 1964 there was, in my opinion, no writing off of the amount in question during that year. (at p458)

11. I go now to the year ended 30th June 1965. For the reasons I have stated, I am of opinion that when the Court approved of the scheme to which I have referred, the deed of release executed by the appellant became effective, the debt of 70,734 pounds 19s. 7d. ceased to exist and there was therefore no debt remaining which could be written off. In those circumstances the "writing off" entry in the appellant's books which was in fact made many months after the deed had become operative served no purpose. Accordingly I am of opinion that the appellant cannot maintain his claim to be entitled to a deduction under s. 63 for the year ended 30th June 1965. It follows that his claim with respect to the year ended 30th June 1966 must also fail. (at p459)

12. Finally it was suggested that if the appellant's claims based upon s. 63 failed, he was entitled to fall back upon s. 51 of the Act and claim that the amount of 70,734 pounds 19s. 7d. was a loss incurred by him in gaining his assessable income, but this contention cannot be sustained if only because the appellant's objections to the assessments in question are plainly based upon s. 63. (at p459)

13. In my opinion the appeals should be dismissed with costs, the cross appeals allowed with costs and the original assessments confirmed, and I order accordingly. (at p459)

Orders

Appeals dismissed with costs. Cross appeals allowed with costs. Original assessments confirmed.