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This Ruling clarifies the circumstances in which a deduction for bad debts will be allowable. In particular, the Ruling explains the operation of paragraph 63 1 b of the Income Tax Assessment Act the Act in relation to taxpayers in the business of the lending of money. The Ruling does not attempt to provide guidance on bad debts in relation to consumer lending such as small personal loans or credit card debts. A separate Ruling will issue on consumer lending. Debt paragraph To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity.
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This Ruling clarifies the circumstances in which a deduction for mone debts will be allowable. In particular, the Ruling explains the operation of paragraph 63 1 b of the Income Tax Assessment Act the Act in relation to taxpayers in the business of the lending of money. The Ruling does not attempt to provide guidance on bad debts in relation to consumer lending such as small personal loans mxke credit card debts. A separate Ruling will issue on consumer lending. Debt paragraph To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad.
A debt mojey for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity. Bad debt paragraphs 26 — A debt dxtabases not necessarily be bad in the strict sense as described in paragraph The question of whether a debt is bad is a matter of judgment having regard to all the relevant facts.
Guidelines for deciding when a debt is bad are at paragraphs Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63 purposes. The debt, however, must not be merely doubtful. Where a trustee in bankruptcy, receiver or liquidator advises a creditor of the amount expected to be paid in respect of a debt, the remainder of the debt i. Writing-off of bad debts paragraphs 34 — The bad debt has to be written off in the year of income before a bad debt deduction is allowable under section The writing-off of a bad debt does not necessarily require highly technical accounting entries.
It is sufficient that some form of written nake is kept to evidence the decision of the taxpayer to write off the debt from the accounts. Debt brought to account as assessable income — paragraph 63 1 a paragraphs 40 — If a taxpayer is not carrying on a business of money lending, a bad debt deduction is not allowable under paragraph 63 1 a unless the debt has been previously included in assessable income.
A taxpayer who is not a money lender and returns income on the basis of cash receipts will not be entitled to a deduction for bad debts because the debts have not been brought to account by the revlew as assessable income. Money-lending business — paragraph 63 1 b paragraphs 42 — Paragraph 63 1 b applies to taxpayers who are engaged in a money lending business. The question of whether a taxpayer is carrying on a money-lending business is a question of fact.
For the purposes of paragraph 63 1 ba money lender need not necessarily be ready and willing to lend moneys llaw the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.
The term ‘in respect of money lent’ in paragraph 63 1 b is to be given its widest meaning and it includes not only the principal of leal loan, but also any capitalised interest and associated costs, charges, fees. Money-lending business at the time of lending paragraphs 49 — For the purposes of paragraph 63 1 bthe taxpayer must be carrying on a money lending business at the time the loan was.
However, it is accepted that a taxpayer does not have to be carrying on a business law review make money off of legal databases money lending at the time the debt is written off in order to satisfy the requirements of paragraph 63 1 b.
Certain taxpayers who fail to satisfy the requirements under section 63 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.
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 Where a taxpayer recoups an amount which has previously been allowed lebal a bad debt deduction under either of subsections 63 1 or 51 1 the taxpayer will have to include this amount in assessable income pursuant to subsection 63 3.
It is not necessary for a taxpayer to write off an entire debt to obtain a bad debt deduction under section A taxpayer is entitled to a deduction for that part of a debt which is bad and is written off. The same tests for deductibility apply as for the whole of a debt. A partial bad debt deduction may arise where debt is secured by property.
Where the debt is discharged only to the extent of the net amount realised from the sale of the security and the remaining debt is still outstanding, the remaining debt i.
The same principle applies where the security is held, for example as mortgagee in possession, rather than sold. In this situation, the remaining debt that may be written off ofd bad is the deficiency between the market value of the security and the amount of debt.
Where the security is taken in full satisfaction of the debt, no bad debt deduction is allowable under section 63 unless the bad debt is written off before the debt is extinguished.
If a deduction is not available under subsection 63 1 any deficiency between the market value of the security and the amount of the debt may, depending upon the circumstances, be an allowable deduction under subsection 51 1 or taken into account as a capital loss under Part IIIA of the Act. Any profit or loss on the subsequent disposal of the security will need to be taken into account under sections 25 and 51 or Part IIIA. Laaw 63E and 63F are specific provisions allowing deductions for losses arising out of debt for equity swaps entered into after 26 February The allowable deduction is the amount by which the amount of the debt exceeds the value of the equity received in the swap.
Prior to 27 February a bad debt deduction arising out of a maek for equity swap may, depending on the circumstances, be allowable under either of subsections 63 1 or 51 1. A deduction is allowable under subsection 63 1 if the taxpayer had written off that portion of the debt that was bad ie. Where a bad debt deduction is not allowable under subsection 63 1 a deduction may, depending upon the circumstances, be allowable under subsection 51 1 for the loss arising out of a debt for equity swap.
This Ruling applies subject to any limitations imposed by statute for years of income commencing both before and after the date on which it is issued. Subsection 63 1 provides that: ‘Debts which are bad debts and are written off as such during the year of income, and; a have been brought to account as assessable income of any year; or 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.
Four conditions must be satisfied in order to qualify for a bad debt deduction. First, a debt must exist. Second, the debt must be bad. Third, the debt must be written off as a bad debt during the year of income in which the deduction is claimed.
Fourth, the debt must have been brought to account as assessable income in any year or, in the case of a mohey lender, the debt must be in respect of money lent in the ordinary course of the business of lending of money by a taxpayer who carries on that business. A debt may be defined as a sum of money due from one person to. As a general ov 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 There is a debt for the purposes of section 63 where a taxpayer has merely an equitable entitlement to the debt G.
Crane Sales Pty Ltd v. 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’ revuew the debtor has died satabases 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 databzses of the liquidator’s final distribution or when the company is completely wound up. 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 if as indicated in paragraph 26.
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. Similarly, in Anderson and Halstead Ltd v. Birrell 16 TC 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’.
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. 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. A debt may be considered to have become bad in any of the following circumstances: a the debtor has died leaving no, or insufficient, assets out of which the debt may be satisfied; b the debtor cannot be traced and the creditor has been unable to ascertain the existence of, or whereabouts of, any assets against which action could be taken; c where the databasfs has become statute barred and the debtor is relying on this defence or it is reasonable to assume that the debtor will do so for non-payment; d if the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt; 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.
While individual cases may vary, as a practical guide a debt will be accepted as databsaes 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 databasee written it off as bad.
This will of necessity vary depending upon the amount of the debt outstanding and the taxpayers’ credit arrangements e. 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 dataases 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 revies is bad and bears the onus of proof in this regard. Subsection 63 2 provides for a debt being bad where the debtor has become bankrupt or has executed a deed of assignment or scheme of arrangement. The debt will be bad to the extent to which the amount of the debt owed to a taxpayer exceeds the amount, if any, which will be received by the taxpayer.
Where the trustee in bankruptcy, receiver or liquidator advises the creditor of the amount expected to be paid in respect of the debt, the remainder of the debt can be written off as bad when the advice is given. A deduction for a bad debt is allowable in the year of income in which the debt is written off. 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 mohey off’ means. 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 mmake as bad. There is a requirement that the debt has to be physically written off. 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 However, the need for the condition as to the writing off of bad debts is fairly apparent.
Against any suggestion that the condition that the debts must be bad makes the further condition superfluous, it has to be borne in mind that in the average case that taxpayer must be allowed a considerable latitude in the exercise of his judgment as to the extent to which any particular debt is regiew, the reason being that it is frequently impossible to foresee future events which might affect the worth of the debt.
The Commissioner is in no better position and, although Section 63 3 is the logical and necessarily intended corrective of the excessive writing off of bad debts by reason of errors of judgment or the unavoidable failure of careful forecasts, the statutory condition as to writing off is a necessary corrective of the difficulties which would arise The requirements of section 63 may be satisfied even though a debt is not elgal 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 databazes 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.
No deduction will be allowed in a year, if the debt is written off after the year’s end at the time when the books of account are being prepared i. The decision of Owen J in Point v. At CLR p. 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.
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