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31 Mar 09 Bad debts written off deductible - BHP Billiton

The Federal Court (Gordon J) has held that a finance company (BHP Finance) that was a member of the BHP Billiton group and that lent funds to other members of the BHP Billiton group was entitled to a deduction under s 25-35(1)(b) ITAA 1997 for 2 bad debts that it wrote off as bad in the 2000 income year. The amount of the 2 debts written of was $1,845,833,281.34, and $310,881,702.40 respectively.

The Court held that BHP Finance was in the business of lending money (despite the Commissioner's arguments that it was a "mere conduit" of its parent); that each loan was made in the ordinary course of that business; and that when written off, the debts were bad. The terms of s 25-35(1)(b) were therefore satisfied. Alternatively, the Court held that BHP Finance would have been entitled to a deduction under s 8-1 ITAA 1997.

Arguments by the Commissioner that Part IVA applied to deny the deduction were rejected by the Court, including an argument that BHP Finance should have forgiven the debts, thereby rendering it impossible to write them off. The Court said, at para 193: "The fact that Finance chose what the Commissioner conceded was the 'most obvious and simple commercial solution' – writing off the debt after it was bad and not the uncommercial step of simply forgiving the debt – does not of itself attract the application of Pt IVA."

BHP Billiton Finance Limited v FCT [2009] FCA 276 (Federal Court, Gordon J, 30 March 2009).

For a copy of the decision, go here.

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