Richard Walter Pty Ltd v Commissioner of Taxation

[1996] FCA 1117

IN THE FEDERAL COURT OF AUSTRALIA          ) 
  )  
NEW SOUTH WALES DISTRICT REGISTRY         )  NG 558 of 1995
  )     
GENERAL DIVISION  )     

On appeal from The Taxation
  Appeals Division of the
  Administrative Appeals Tribunal
  constituted by Mr B J McMahon
  (Deputy President)

BETWEEN:          RICHARD WALTER PTY LTD

Applicant

AND:                   COMMISSIONER OF TAXATION

Respondent

Coram:        Davies J
Place:         Sydney
Date:          20 December 1996

REASONS FOR JUDGMENT

Introduction
         This is an appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") which affirmed decisions of the Commissioner of Taxation ("the Commissioner") disallowing certain objections against assessments issued in respect of the applicant, Richard Walter Pty Ltd ("Richard Walter") for the years ended 30 June 1981 and 30 June 1982.  In issue are the sum of $250,000 which Richard Walter
purported to write off as a bad debt in the year ended 30 June 1981 and certain legal expenses, alleged to be incurred in attempted recovery of the debt.  Richard Walter relies upon s.51(1) and s.63 of the Income Tax Assessment Act 1936 (Cth) ("the Act") and upon the carry forward loss provisions in s.80 of the Act. The write off was dated 25 June 1981 but it is accepted that the entry was not in fact made until the following year of income. The years ended 30 June 1981 and 1982 are both involved. As the appeal is brought under s.44 of the Administrative Appeals Tribunal Act 1975 (Cth), it raises only questions of law.

Richard Walter, of which Dr T R Wenkart and Mr G A Holden were two of the directors, was one of a group of companies called the Wenkart group, which group was concerned with the provision of medical and associated services.  In 1981, Richard Walter owned several freehold properties, presumably used in the group's businesses, and held shares in some private companies, again presumably part of the group, but its principal activity was as financier to the group.  Mr Holden deposed as follows:    

"5.In 1977, the Applicant had a small number of investments but its main function, which increasingly became its dominant function, was to act as the financier of the Group.  For this purpose the cash position of each company in the Group was reviewed daily as were the cash needs of each company in the Group and if any company had a significant credit balance with the Bank, that money was taken over into the account of the Applicant by way of loan and if any company needed addition [sic] funds, that money was lent by the Applicant to the company.

6.If the Group as a whole had surplus cash funds, that surplus was invested by the Applicant, either in fixed term deposits with the banks or with financial institutions, to achieve the best available return in the light of the security and terms available.  From time to time, if the Group as a whole needed additional funds, then it was the Applicant which made overdraft
arrangements or long-term arrangements with banks or other financial institutions to secure the necessary working capital for the Group.

7.In some cases, if long term finance was required for a project, then the company concerned would borrow directly from the Bank on security of a first mortgage over its assets and the balance of working capital would be borrowed by the Applicant by overdraft or bill facility from the Bank, and lent to the company requiring funds.  To

[sic] support that overdraft or facility, Other [sic] companies in the Group often made available properties and granted security by way of third party mortgages to the Bank or other financial institutions.

8.The practice set out in the three preceding paragraphs was in force when I joined the group in 1977 and has continued until well after the years in dispute in this matter.  The companies in the group to whom loans were made were almost all subsidiaries of the Applicant, and in most cases were wholly-owned subsidiaries or sub-subsidiaries of the Applicant."

In its financial statements for the year ended 30 June 1981, Richard Walter, which has been registered as a money lender since at least 1976, disclosed two secured or partly secured long term loans totalling $567,440, four unsecured long term loans totally $1,909,128, two short term secured loans totalling $294,760 and thirty nine unsecured loans to various companies and persons totalling $3,433,970. 

Evidence was given that loans made by Richard Walter were usually, but not always, recorded in its minutes and that Richard Walter had a standard loan agreement which was usually, but not always, used.  Most of the loans made were unsecured and the total interest received for the year ended 30 June 1981 was only $236,080.  Very often interest was not charged to companies and persons in or associated with the group.  Richard Walter's liabilities, due mainly but not entirely to companies and persons in or associated with the group, totalled $9,615,021.  Its operating loss for the year ended 30 June 1981 was $620,468 and, at that date, it had a net deficiency of $564,950. 

In early 1981, Dr Wenkart, the principal controller of the group, and a Dr E Molodysky came to an understanding that a surgical hospital, the United Gardens Private Hospital ("the hospital"), should be acquired from its then owner, Gedd Pty Ltd ("Gedd").  The negotiations between Dr Wenkart and Dr Molodysky were oral.  A dispute subsequently arose as to the terms of their agreement.  Bayswood Pty Ltd ("Bayswood"), which had been incorporated on 7 May 1981 as a shelf company, was acquired as the vehicle for the purchase.  Dr Molodysky and Dr Wenkart apparently each received one of the two shares in Bayswood and were to become the two directors of the company, but the formal step of their appointment was not taken.   The hospital became the subject of a Memorandum of Agreement ("the agreement") to purchase dated 15 May 1981.  The agreement provided for settlement to take place on 15 June 1981, at which date the balance of the purchase price of $310,000 was to be paid.

It was originally thought that the money to purchase both the business and the real estate would be provided by a continuance of the existing mortgage over the land and by a second mortgage from a finance company.  However, for reasons which remain unclear, the mortgages were not forthcoming and finance had to be obtained from another source if settlement was to take place on 15 June 1981.  At some stage, Dr Wenkart arranged for Richard Walter to finance the acquisitions.  

On 13 June 1981, Dr Wenkart met with Dr Molodysky and a Mr J Thomas at the office of Mr Thomas.  At this meeting, Dr Wenkart, according to Mr Holden's evidence, gave to Mr Thomas and discussed with Dr Molodysky a number of documents and minutes, the purpose of which were, inter alia, to establish certain trusts so that Bayswood could carry on the hospital business as a trustee.  There is a dispute as to what was then said or agreed on.  Dr Molodysky later acknowledged receiving a draft trust deed, but denied receiving it on that date and denied showing it to Mr Thomas or in any way assenting to it.  In any event, Dr Molodysky did not execute any of the documents and subsequently refused to do so.

Settlement took place on 15 June 1981, with Richard Walter paying the acquisition costs.  The actual purchase price for the business of the hospital was $310,000, which was reduced by $23,437.43 for liabilities for long service leave and holiday pay and increased by $12,405.95 for stock, the balance being $298,968.52.  $9,235.10 was also advanced to meet the stamp duty on the agreement for purchase.  Richard Walter also paid a total of $250,272.26 on behalf of Lanstel, the purchaser of the land, which payment is not the subject of the present proceedings. 

The agreement dated 15 May 1981 executed between Gedd and Bayswood provided, in part:

"2.  The Vendor will sell free from all encumbrances, charges and liens and the Purchaser will purchase the goodwill of `United Gardens Private Hospital' now carried on by the Vendor at the aforementioned premises together with the whole of the plant, equipment, furniture utensils and accessories as well as all the fixtures, fittings, chattels and stock of the said business.

3.  The purchase price shall be Three hundred and ten thousand dollars ($310,000.00) and shall be apportioned in the manner following:-

(a)      Goodwill              .       $275,933.00
         (b)      Hospital plant and equipment $  34,067.00
         (c)      Stock to be determined by stock-taking

...

8.  The Vendor shall be entitled to collect all book debts and other monies owing to it in connection with the said business which shall be unpaid at the date hereinbefore fixed for completion..."

The part of the agreement which is in evidence was executed on behalf of Gebb.  It is not clear who signed the other part.  Presumably Dr Wenkart or Mr Holden attended to that.  In any event, the agreement was executed and stamp duty of $9235.10 was paid on it.  No formal documentation of the loan to Bayswood was executed. 

Dr Molodysky did not participate in the settlement.  On 17 June 1981, Mr Holden, as the secretary of Richard Walter, wrote to the solicitors for Dr Molodysky stating, inter alia:

"...it is our understanding that Dr. Molodyski [sic] has never disputed the facts that,

A.1     At exchange of contracts, the intentions of the parties were -

a)The two companies involved in the purchase of United Gardens Private Hospital, namely Lanstel Pty. Ltd. which has acquired the land and Bayswood Pty. Ltd. which acquired the business, were both established on the basis of being trustees of two separate unit trusts.  This intention was clear at the time of exchange of contracts for purchase on May 15th, 1981.

b)Dr. Wenkart or his interests were to have no less than 51% of both unit trusts and trustees.  In consideration for this fact, Dr. Wenkart agreed to fund the necessary requirements needed to procure the hospital and provide working capital.

c)It was the intentions of Dr. Wenkart and Dr. Molodyski at the time of exchange on May 15th, 1981 to arrange for 35% of the units to be available to acceptable third parties.

d)At the time of exchange, Dr. Molodyski was to have 14% of the units issued.

....

A.2Prior to settlement, the facts are that following a meeting on Saturday 13th June, 1981 .... the following matters were agreed -

a)That the trust documents which were received by Mr Thomas and discussed with Dr Molodysky and Dr Wenkart were suitable and would be used and executed by Mr G.A. Holden and would be used as the basis of the trust settlement by Mr G.A. Holden operating from May 15th, 1981.

b)That the units to be held by Dr. Molodyski and Dr. Wenkart's interests were to be held in the ratio of 51/100 and 14/100 with 35/100 remaining unissued at this time and subject to allocation to acceptable third parties.

c)That the trustee companies, Lanstel Pty. Ltd. and Bayswood Pty. Ltd. are trustees of the established trusts namely United Gardens Property Trust and the United Gardens Hospital Trust.

..."

The letter went on to discuss the settlement on 15 June 1981 and requested that Dr Molodysky fulfil his legal obligations as a director of Bayswood. 

The letter in reply took a different view as to what had been agreed.  In particular, Dr Molodysky denied that it had been agreed that the companies were to be established as trustees of a separate unit trust and asserted that Dr Molodysky and Dr Wenkart were each to acquire one share in Bayswood and Lanstel.  Dr Molodysky accepted that Dr Wenkart was to have a 51% share holding in the companies but denied that 35% of the share holding was to be made available to third parties, asserting that only 25% was to be made so available.  Dr Molodysky acknowledged having the draft trust deed in his possession but denied receiving it until 18 June 1981 and denied consenting to it or to any variation of the original proposal.

Fifteen days after settlement, Dr Wenkart commenced proceedings in the Supreme Court of New South Wales to have Bayswood wound up on the just and equitable ground.  The proceedings were later amended to show Richard Walter as the petitioning creditor.  A provisional liquidator, Mr J.E. Walker of Walker, Meares & Co., was appointed on 30 June 1981.   On request, Richard Walter advanced two sums to the provisional liquidator to enable him to pay wages and to carry on the business.   On 16 July 1981, a formal demand was made by Richard Walter requiring Bayswood to pay certain sums, including the sums loaned to the provisional liquidator.  On 31 August 1981, the Supreme Court of New South Wales ordered that Bayswood be wound up and appointed Mr Walker as liquidator.  The company was eventually dissolved on 9 July 1982.

On 22 October 1981, Richard Walter lodged a proof of debt for $311,154.62.  Later, Richard Walter received from the liquidator a distribution of $36,389.34  leaving a balance of $275,920.28 of the moneys paid.  Richard Walter made allowance for a further possible distribution of $25,920.28, giving a rounded balance of $250,000, which sum was purportedly written off in the accounts of Richard Walter on 25 June 1981 as follows:

"Write off of loan A/C balance after allowing for monies received from liquidator and estimated possible receipts [?]

Balance of loan A/C             ..       $312,309.62
         Less monies received from liquidator  $ 36,389.34
   ......       $275,920.28

Less possible further distribution      $ 25,920.28
   ........       $250,000.00"

The balance written off included interest.

Earlier, on 8 July 1981, a letter had been sent to Dr Wenkart from the provisional liquidator calling upon the directors of Lanstel, Dr Wenkart and Dr Molodysky, to procure a lease between Bayswood and Lanstel over the land.  The provisional liquidator also suggested that, if Dr Wenkart was interested in making an offer to acquire the goodwill and equipment of the company, he should do so.   Lanstel did not proffer a lease. 

By letter dated 9 July 1981 to the provisional liquidator, Dr Wenkart, on behalf of Ultera Pty Ltd ("Ultera"), another company in the group of which Dr Wenkart and Mr Holden were directors, made the following offer:

2.That Ultera Pty. Ltd. or its nominee will acquire all the assets (including debtors, funds, equipment and stock) and goodwill of Bayswood.  This is to include any rights or benefits or intended benefits, subject to legal action, accruing to Bayswood on its purchase of the business from Gedd Pty. Ltd. on June 15, 1981.

3.The Provisional Liquidator is to obtain and complete all necessary documentation plus licenses and to co-operate in lodging with the necessary departments required to obtain approval for transfer of the assets in (2) above.

If necessary, the Provisional Liquidator undertakes to transfer the licence, all rights and benefits associated with the Hospital Licence  now existing, to Ultera Pty. Ltd. or its nominee.

4.Ultera or its nominee  will pay out all liabilities, including provisional liquidation costs and fees, incurred by the Provisional Liquidator, since the date of his appointment up to July 13, 1981.

5.Ultera or its nominee will take over all liabilities due as a result of benefits owing to staff, including long service leave, holiday leave, and sickness benefits, which are owing to the staff at the date of purchase by Ultera.

6.Further to the above commitment, Ultera or its nominee agrees to pay out all bona fide creditors other than Richard Walter Pty. Ltd.
who became creditors on or after June 15, 1981, up to June 30, 1981 when you were appointed as Provisional Liquidator.

7.Ultera also agrees to pay a further thirty thousand dollars ($30,000) as part of its consideration for purchase.

8.As part of the consideration, it is intended that the business name "United Gardens Private Hospital", be transferred to Ultera, or its nominee, and that the business be on a continuing operational basis.

9.Settlement of this transaction is to take place no later than Monday, July 13, 1981.

10.If you require any funds prior to this date, we also offer to cover any commitment which you are unable to meet, on the condition that the above offer is formally accepted."

The offer was accepted by the liquidator and the business of Bayswood was sold to Ultera.

According to the Official Liquidator's Report to a meeting of creditors of Bayswood on 2 April 1982, the liquidator obtained a net receipt of $67,887.23 on the sale of the business.  This sum had been paid by Richard Walter for Ultera.  It should be noted that all the creditors of Bayswood were paid out save Richard Walter.  Dr Wenkart and Mr Holden had arranged that.  They had also arranged or agreed that no lease would be provided by Lanstel, with the result that the liquidator could not sell the business on the open market for a reasonable price.  Mr Holden gave this evidence, inter alia:

"Richard Walter agreed that it would not be paid but all bona fide creditors other than Richard Walter who became creditors on or after 15 June would be paid?---Yes; that's correct.

Yes.Richard Walter agreed to that?---Yes."

The Tribunal found against Richard Walter on many grounds.  The Tribunal obviously formed an unfavourable view of Richard Walter and the transaction.  The Tribunal held that Richard Walter did not lend any money to Bayswood, that if did so it did not make the loan in the ordinary course of the business and that it did not carry on the business of lending money.

I feel empathy with the ultimate conclusion of the Tribunal that Richard Walter was not entitled to a deduction in relation to the Bayswood transaction.  It would seem that Richard Walter lost money only because the persons who were in control of Richard Walter decided that Ultera, not Richard Walter, would be the purchaser of the business.  All moneys, even Ultera's purchase price, were paid by Richard Walter, yet the valuable hospital business was transferred to Ultera.  Ultera then carried on the business and was granted security of tenure.   The Wenkart group thus obtained the asset, the hospital business, which had been purchased from Gebb.  It would seem that Dr Wenkart and Mr Holden could have arranged for Richard Walter to purchase the business from the liquidator, or for Ultera to pay full price, extinguishing the debt to Richard Walter.  Thus, it is at least arguable that the debt due by Bayswood to Richard Walter was bad only because those in control of its affairs so arranged the matter.

However, the Tribunal did not deal with the case in that way and the issue I have just discussed is only a possible argument, the factual and legal basis of which has not been investigated either before the Tribunal or before this Court.  I make no findings about it.

Whether there was a debt
         The Tribunal dealt, firstly, with the claim for a deduction under s.63(1)(b) which provides:

"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 Tribunal noted that the taxpayer must establish that there is a debt owing to it, that it carries on the business of the lending of money, that the money lent is lent in the ordinary course of such business and that the debt is a bad debt. 

On the first question, whether there was a debt, the Tribunal held that there was not.  The Tribunal said, on this point:

"...None of the moneys forming part of the claim were paid directly to Businessco [Bayswood].  They were paid to third parties.  Some of the gross sums were paid to the provisional liquidator.  The mere fact that moneys were paid to third parties does not, in itself, preclude the founding of an obligation on the part of a borrower.  There is a `notional or imputed promise' in those circumstances, provided that the moneys are paid at the request of the borrower.

In my view, there is no satisfactory evidence of this having occurred.  At the meeting on 13 June, the 2 principals involved were clearly not ad idem.  Nothing else could explain the subsequent course of events and the litigation.  They were certainly not directors of Businessco at law, nor were they acting in accordance with that company's articles of association.  Even assuming the economic reality that Businessco had been acquired with the intention that they should become directors, it is clear from the subsequent course of events that the plan for making the payments in the way in which they were subsequently made, was in the mind only of Dr W.  Fifteen days after the events, namely on 30 June 1981, solicitors for Dr M expressed their client's surprise at the existence of the applicant and the fact that it had been involved in the settlement arrangements.

The fact that the liquidator admitted a claim from the applicant to prove in the winding up, does not of itself show that there was a debt or constitute some sort
of ratification of what had gone on before the liquidation.  The governing factors will be those present at the time the alleged debt is said to have been incurred.

Furthermore, even if it were found that the amounts were paid by the applicant at the request of Businessco, that fact in itself would not establish that there was a loan.  There was no documentation.  The terms are to be inferred only from oral evidence of the secretary of the company.  Neither Dr W nor Dr M was called to give evidence in these proceedings.  What was agreed and what was not agreed between these proposed directors of Businessco was therefore left up in the air.  There was never any resolution of directors in accordance with the company's articles of association, authorising the making of the payments, or acknowledging their character.  The only written evidence recording the payment appears in the books of the applicant.  For reasons which are here irrelevant, even those original entries were made in error and related to a different company.  The payments are just as consistent with a proposed acquisition of an equity interest by the applicant.

In short, I am not satisfied that loans made up in the way I have described were made by the applicant to Businessco upon the terms alleged by the applicant."

However, in my opinion, there was only one conclusion which was reasonably open on the material which was before the Tribunal and that is that Richard Walter, on 15 June 1981, lent to Bayswood the sum which it paid to Gebb on Bayswood's behalf.  

The fact that the persons who acted as the directors of Bayswood were not formally appointed does not conclude the matter. Section 60 of the Corporations Law defines the term "director" as including persons who occupy or act in the position of director, by whatsoever name called and whether or not they are validly appointed or duly authorised to act in the position.  It is a common fact of commercial life that many persons who are not duly authorised to act as directors so act, particularly where private companies are concerned.

It is not in doubt that Bayswood purchased the business of the United Gardens Private Hospital and, indeed, entered into the agreement to purchase on 15 May 1981, before there was a disagreement between Dr Wenkart and Dr Molodysky.  Gedd and Bayswood were at arm's length and the purchase was an arm's length dealing for full consideration.  On 15 June 1981, the purchase was settled and Richard Walter, the financier, provided the funds for the acquisition. 

The provision of funds at the time of settlement with the making of a payment directly from a financier to a vendor is a common means by which such transactions are effected.  This transaction was carried out in that way.  There is no reason to limit the meaning of the term "moneys lent" to transactions which exclude a direct payment of funds from a financier to a vendor in a settlement in which the borrower is acquiring assets.

That Bayswood acquired the business and carried it on is not in doubt.  That the liquidator of Bayswood, who again was at arm's length with Richard Walter and the other companies and persons associated with the Wenkart group, carried on the business and later sold it to Ultera is also not in doubt.  I should add a fact which I have not previously mentioned.  Dr Molodysky challenged the proposed sale by the liquidator to Ultera in proceedings in the Supreme Court of New South Wales.  The liquidator was authorised by the Court to proceed with the sale.

In the light of the facts which occurred, it seems to me that it was unreasonable and wrong to hold, as the Tribunal did, that Richard Walter did not lend moneys to Bayswood. The Act operates on facts which have occurred, whether or not they have taken place with all due propriety. Bayswood purchased the business
of the hospital and Richard Walter, which was acting in the interests of Bayswood, advanced money to enable it to do so.  Thereafter, Bayswood carried on the business, which subsequently was sold by the  liquidator.

As Dr Wenkart and Mr Holden were directors of Richard Walter and Ultera, and as Dr Wenkart acted on behalf of Bayswood, though not formally appointed, the case has similarities with the facts considered by von Doussa J in Beach Petroleum NL v Johnson (1993) 43 FCR 1. One of the points which his Honour discussed at p.30 is that a company which has taken the benefit of a transaction which was entered into on the company's behalf by an agent who was not authorised may not disavow the transaction. His Honour cited the words of Lord Macnaghten in Lloyd v Grace, Smith & Co [1912] AC 716 at 738 that:

"... by taking the benefit he [the company] has adopted the act of his agent; he cannot approbate and reprobate."

The Tribunal remarked that the moneys paid by Richard Walter may have been paid for an equity interest.  However, the evidence discloses that no trust had been established by 15 June 1981.  Draft trust deeds had been prepared but they had not been executed.  The Tribunal indeed rejected the tender of a draft trust deed on the ground that it was not probative of any fact.  It follows that the moneys paid by Richard Walter were not paid to obtain an equity interest but as an advance to Bayswood.  Even if it had been contemplated that Richard Walter might take an equity interest as a trust, that was a matter for the future.

In the circumstances, it seems to me that the finding made by the Tribunal that no moneys were lent by Richard Walter to Bayswood, was so unreasonable that no reasonable decision maker should have made it. It is accepted that such an error is an error of law for the purpose of s.44 of the Administrative Appeal Tribunal Act.

Business of Lending Money
         The Tribunal concluded that Richard Walter did not carry on a business of lending money.  It examined Richard Walter's position as financier within the group,  noting that Richard Walter managed the company's cash flow and that interest was often, if not always, charged, depending on the circumstances.  The Tribunal found that there was "no indication of the terms of any particular loans, the circumstances in which they were made, the individual rates of interest for particular loans and the regularity with which advances were made."  Furthermore, the Tribunal found that the fact that the interest formed some percentage of the income of the applicant did "little to assist a consideration of the elements of continuity and system."  The Tribunal noted:

"The overall impression one obtains from a consideration of this evidence is that the applicant largely relies on particular investments in particular projects or businesses, together with the unremunerated activity of acting as a conduit for the flow of funds within the group."

The Tribunal also said that it was essential that a business be carried out with a
view to profit, which, given Richard Walter's policy on interest, was not the case. 

The Tribunal concluded:

"In determining whether there was a money lending business, it is also important to consider the nature of the business.  It is an essential element in any such concept (as was stated in (Hyde) that the activities be carried on with a view to a profit.  I have referred to the applicant's policy as to the charging of interest.  This policy is not one which can consistently stand with the carrying on of a business intended to yield a profit to the applicant.  In fact by acting as a conduit or banker for the group, the applicant enabled other related companies by its interest charging policy to profit at its own loss.  The applicant's `substantial purpose' was not the carrying on of a money lending business.  Its dealings in money were in the interests of any member of the group holding businesses or conducting ventures from time to time with a view to promoting the best interests for the group as a whole.  Having regard to the unsatisfactory approach of continuity and system and to the evidence of the un-businesslike approach of the applicant, I am not satisfied that the applicant carried on the business of the lending of money at the relevant time."

The Tribunal also found that the subject payments were not made in the ordinary course of its business as they were "paid without documentation, without a clear agreement on the part of the persons most concerned with the fate of the moneys, and without a prospect of repayment 15 days after the moneys were paid."

Had these findings stood on their own I doubt that I would set aside the decision of the Tribunal.  The points were arguable and the facts taken into account were relevant. 

Nevertheless, another decision maker could have arrived at the view that Richard Walter was carrying on a business of lending money and that the loan was made in the ordinary course of that business.  Indeed, just five days after the Tribunal handed down its decision, Tamberlin J made such a finding in Richard Walter Pty Ltd v Federal Commissioner of Taxation (1995) 95 ATC 444. His Honour dealt, inter alia, with issues arising in respect of amended assessments for the years ended 30 June 1981 to 30 June 1984 inclusive and also for the year ended 30 June 1989. In respect of that last year, his Honour had to consider a claim to deduct bad debts with respect to moneys lent by Richard Walter to Dr G. Edelsten. His Honour concluded that Richard Walter was carrying on a business of lending money and that the moneys that were lent to Dr Edelsten were lent in the ordinary course of that business. His Honour therefore concluded that Richard Walter was entitled to a deduction in respect of the writing off of the bad debt.

Section 51(1)
         The Tribunal did not consider in detail the issues arising under s.51(1), holding that the claim for a deduction under that section failed for the same reasons that the claim under s.63 failed.  As a deduction under s.51 (1) necessarily depends upon the facts found, I need not discuss the issues which might arise under this section.

The claim for legal expenses
         The claim for a deduction with respect to legal expenses amounting to $14,8646.60 alleged to have been incurred in attempting to collect the debt from Bayswood was brought under s.51 (1).  This claim also is necessarily dependent upon the facts found.  No purpose would be served by my discussing it.

Conclusion
         In the Australian Broadcasting Tribunal   v Bond (1990) 170 CLR 321, Mason CJ examined the meaning of the word "decision" in s.3(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) and, at 359-360, pointed to the distinction between a "decision" and a "finding of fact." The other members of the Court, Brennan, Deane, Toohey & Gaudron JJ, were in general agreement as to this.

Similar principles apply under s.44 of the Administrative Appeals Tribunal Act.  A decision will not be set aside merely because it involved the making of a finding of fact which was unreasonable.  But if the unreasonable finding of fact was crucial to, that is to say interwoven into, the final decision, then the decision itself may be set aside.  This was the case in Minister for Immigration, Local Government & Ethnic Affairs v Pashmforoosh (1989) 18 ALD 77, to which Mason CJ referred at 359.

In the present case, I have concluded that the finding of fact by the Tribunal that there was no debt was unreasonable.  That finding dealt with only one of the criteria specified in s.63(1) and the Tribunal also made adverse findings on other grounds.  Nevertheless, the fact that the Tribunal made an error in its approach to the lending of money throws doubt on its findings that Richard Walter did not engage in the business of the lending of money and that the subject moneys, if lent, were not lent in the ordinary course of such business.  In a case such as the present, the approach taken by the Tribunal on the issue of moneys lent necessarily pervaded the other findings.

It follows that the decision under review must be set aside.

Accordingly, the order of the Court will be that the decision under appeal will be set aside and the matter will be remitted to the Administrative Appeals Tribunal to be heard and decided again with or without the hearing of further evidence.   The respondent should pay the costs of the appeal.

I certify that this and
the preceding nineteen
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Davies.

Associate :

Date :  20 December 1996

Counsel for the applicant : ........      M Cashion

Solicitors for the applicant :....... Mallesons Steven Jaques

Counsel for the respondent :....... S. W. Gibb  

Solicitor for the respondent :...... Australian Government Solicitor

Date of hearing :              ........ . 29 August 1996  

Date of judgment :           ........ . 20 December 1996  

IN THE FEDERAL COURT OF AUSTRALIA               )
  ........ .   )
NEW SOUTH WALES DISTRICT REGISTRY              )     No.NG 558 of 1995
  ........ .   )
GENERAL DIVISION     ........ .   )

BETWEEN : RICHARD WALTER PTY LTD

........ .      Applicant

AND : ........ . COMMISSIONER OF TAXATION

........ .      Respondent

Coram :       Davies J

Place :         Sydney
Dated :        20 December 1996

CORRIGENDUM

Please amend the aforementioned judgment as follows:-

Page 18 - third paragraph, line 2 should read - "$14,846.60".

Elizabeth Avery
  (Acting) Associate to Justice Davies

13 January 1997