CA ORDS INCOME TAX - deductions - money on short-term loan with failed financial institution written off as 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(1)(»b) COMMISSIONER OF TAXATION v MARSHALL AND BROUGHAM PTY LIMITED G. 47 OF 1986 ADELAIDE 4 June 1987 IN_THE COURT OF AUSTRALIA ) ) SOUTH AUS' IA_ DISTR 8 ) No. G47 of 1986 ) ) GENERAL D ON ON APPEAL FROM THE SUPREME COURT OF SOUTH AUSTRALIA BETWEEN : COMMISSIONER OF TAXATION - and - MARSHALL AND BROUGHAM PTY LIMITED CORAM: Bowen C.J., Jenkinson and Burchett JJ. PLACE: Sydney DATE: 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. FED: UR' US ) Q A DIS ISTR No. G47 of 1986 GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF SouTH AUSTRALIA COMMISS OF TION - and - MARSHALL AND BROUGHAM PTY LIMITED CORAM: Bowen C.J., Jenkinson and Burchett JJ. DATE: 4 June 1987 EASONS FOR JUDGMENT OWEN 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 Commissioner 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.5l(l1) of the income 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 8.51 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 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 buildin 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 position of corporate accountant for the group. He was a qualified accountant with a university 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 Mr 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, many of whom were outside the taxpayer's own group of companies, or to discharge other trading debts. This time lag 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, Mr Marshall, who had later become Finance Director of the taxpayer company and the group asa 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 $500,000, was Associated Securities Ltd. (A.S.L.). There was undisputed evidence from Mr 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 profit 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 sub-contractors) 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 Marshall thought it was a little earlier - the taxpayer began to make similar deposits on loan from its current cash receipts 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 receivership on or about 8 February 1979. It is common ground that at that date the taxpayer had $500,000 on 'loan' to A.3.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 Marshall 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 Loss 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 toa Profit and Loss Appropriation Account as follows:- $ $ 1978 1979 60202.16 Balance 1.7.78 77741.81 900.85 Add over provision Income Tax 2085.51 16044.00 Less Dividend Paid 19740.00 15143.15 17654.49 32682.80 Add Profit (Loss) transferred (429680.18) (447334.67) 77741.81 Balance 30.6.79 (369592. 86) The amount by which this account is 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 Funds would have been augmented by unappropriated profits of $130,407-14 instead of showing 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 8. 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 was 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 Ltd 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 this 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) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover 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.S8.L. it was "a loss of or concerning part of the 'profit yielding subject'" (Charles Moore & Co. (W.A.) Pty Ltd v. Federal Comm oner__o Taxa m (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 Airways 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. Counsel 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. 10. As I understood the argument for the Commissioner, if the taxpayer had simply left the money ina bank account until such time as it was required for payment to the relevant company it would still 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.51(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. ll. 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. It was put that moneys temporarily placed in the short term money market may be an asset which represents the daily takings of a 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. 12. 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 Pty 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 13. 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 as a case where income was produced in the course of the discharge by the taxpayer of its functions as the management 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 own, which should characterise a loss incurred in the process as being a loss of capital or aloss 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(1)(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 s8.63(1)(b) of the Act. 14. Section 63(1)(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(1)(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 Cc ion f v. Na nal Commercial Bankin 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 Fairway Estates Pty. Ltd. v. Federal Commissioner of Taxation (1970) 123 C.L.R. 153). 15. 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. Dreyfus £19063 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. Pyke (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 16. transactions with the finance companies involved must be regarded as simply 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(1)(b). This fs 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 Nigel Bowen. fis " Villy Associate pated: 4 June , 1167 17. Counsel for the Appellant: Mr M.E.J. Black Q.C. Dr I.J. Hardinghan Solicitors for the Appellant: Australian Government Solicitor Counsel for the Respondent: Mr A.R. Castan Q.C. Mr S8.T. O'Loughlin Solicitors for the Respondent: O''Loughlin Robertson {¢) OF ) SOUTH _AUS' pDIs STRY ) No. G47 of 1986 IVISIO ) On appeal from the Supreme Court of South Australia BETWEEN: ie) ssIo OF T TIO Appellant AND: MARSHALL AND BROUGHAM PTY. LIMITED Respondent CORAM: Bowen C.J., Jenkinson and Burchett JJ. DATE: 4 June, 1987 S FOR J I agree in the reasons for judgment of Bowen C.J. on both questions argued in this appeal. I certify that this page is atrue copy of the Reasons for Judgment herein of the Honourable Mr. Justice Jenkinson. Uy, Associate Dated: 4 June, 1987 IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY No. G.47 of 1986 weer we ww GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF SOUTH AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: MARSHALL AND BROUGHAM PTY LIMITED Respondent CORAM: Bowen C.J., Jenkinson & 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 in 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. As 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 3. 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 [1891] 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. Commissioner of Income-tax, Lahore [1940] 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 4. 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 second 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, 1t 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; 5. 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, in 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 Financial Services Limited v. The Commissioner of Taxation of the 6. Commonwealth of Australia (1982) 150 C.L.R. 510 at 531 as one of the authorities supporting the statement that "it has been said on a number of occasions that money is the stock-in-trade of bankers and money-lenders." In the Avco Financial Services case at 527 the same joint judgment described the finance company's business operation as the turning over of money at a profit, and it was on this basis that an exchange loss in respect of its 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 stock ~ the taxpayer in effect deals in the money." 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) 50 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 reguire the conclusion that the nature of the business operations conducted 7. by the respondent was such as to make the loss that was sustained a revenue loss. The business activity in question, 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 willing to lend to 8. 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 finding 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 in the "cases upon the application of legislation 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 Taxation v. Mercantile Credits Ltd. (1986) 64 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 activities in the community, which of their nature undergo change and develop new ' 9. 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 section. 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 Vv. National Commercial Banking Corporation of Australia Limited (1983) 83 ATC 4715 at 4719), 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(1)(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. Cou Associate Dated: 4 June,—1987