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Income tax: if a moneylender (A) sells its loan book to a taxpayer (B) and later B writes off some of the debts in the loan book as bad, can B claim those bad debts as deductions under paragraph 63(1)(b)?

Preamble

No. Deductions for bad debts are only allowable under paragraph 63(1)(b) of the Income Tax Assessment Act 1936 where those bad debts are in respect of money lent in the ordinary course of a moneylending business carried on by the taxpayer claiming the deduction (see FCT v. National Commercial Banking Corporation of Australia Ltd 83 ATC 4715, at p. 4719, (1983) 15 ATR 21; 15 TBRD Case 49 at p. 383; 3 TBRD (NS) Case C3 at p. 17).

The purchase of an existing debt from another person is not a loan of money by the purchaser of the debt. A deduction is not, therefore, allowable under paragraph 63(1)(b) for a bad debt where that debt was purchased from another person. This is the case whether or not the person who originally lent the money did so in the ordinary course of a business of moneylending. NB. This issue was originally considered in Draft TD 92/5. Draft TD 92/5 is withdrawn.

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