WRBD and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/3272-3278)
Judgment date: 20 May 2009
Date published: 10 September 2009
Decision outcome: Favourable

Summary of decision:
Outlines the Tax Office's response to this case which concerned the deductibility of a loss on the disposal of convertible notes where one of the reasons for the disposal was because the company issuing the convertible notes was placed into receivership.

Overview of facts:
1. In the 2000 financial year the taxpayer, a shareholder of Harris Scarfe Holdings Ltd ('the company') took up an offer to acquire convertible notes. In addition to those notes, the taxpayer had also acquired on the market the rights to buy further convertible notes. 2. In total, the taxpayer acquired 593,917 convertible notes for $1.40 per note for a total consideration of $831,483.80. The purchase of the convertible notes resulted from a transaction entered into between a taxpayer and the company which was not in the ordinary course of trading on a securities market. However at the time the taxpayer acquired the notes, it was open for her to acquire them in the ordinary course of trading on the securities market. 3. In early 2001, the company was placed into voluntary administration. Its securities were suspended from trading on the ASX on 3 April 2001 and it was placed into receivership with the appointment of receivers and managers on 6 April 2001. A resolution to wind up the company was passed on 3 January 2002. 4. On 10 December 2004, the taxpayer sold 500,000 notes for a total consideration of $1,000 in an off-market transfer to an unrelated third-party. The sale resulted in a substantial loss to the taxpayer. | 1. In the 2000 financial year the taxpayer, a shareholder of Harris Scarfe Holdings Ltd ('the company') took up an offer to acquire convertible notes. In addition to those notes, the taxpayer had also acquired on the market the rights to buy further convertible notes. 2. In total, the taxpayer acquired 593,917 convertible notes for $1.40 per note for a total consideration of $831,483.80. The purchase of the convertible notes resulted from a transaction entered into between a taxpayer and the company which was not in the ordinary course of trading on a securities market. However at the time the taxpayer acquired the notes, it was open for her to acquire them in the ordinary course of trading on the securities market. 3. In early 2001, the company was placed into voluntary administration. Its securities were suspended from trading on the ASX on 3 April 2001 and it was placed into receivership with the appointment of receivers and managers on 6 April 2001. A resolution to wind up the company was passed on 3 January 2002. 4. On 10 December 2004, the taxpayer sold 500,000 notes for a total consideration of $1,000 in an off-market transfer to an unrelated third-party. The sale resulted in a substantial loss to the taxpayer. | Issues decided by the court or tribunal | The Tribunal found that subsection 70B(4) of the ITAA 1936 operated to deny the taxpayer a deduction under subsection 70B(2) because the convertible notes disposed of by the taxpayer, being marketable securities, were not disposed of in the ordinary course of trading on a securities market. | The taxpayer argued that since it was open for her to acquire identical securities in the course of ordinary trading on the securities market, subparagraph 70B(4)(c)(ii) was not met and therefore subsection 70B(4) does not operate to remove the deduction available under subsection 70B(2). | The Tribunal rejected the taxpayer's argument for a literal interpretation of subsection 70B(4) of the ITAA 1936, and adopted a purposive approach since a literal interpretation of the subsection would not achieve the intention of the legislature. | Having regard to sections 15AA and 15AB of the Acts Interpretation Act 1901 and the High Court authorities of CIC Insurance Limited v Bankstown Football Limited (1995 ) 187 CLR 384 and others, the Tribunal determined that it was appropriate for it to consider extrinsic material which included the Explanatory Memorandum and the Second Reading Speech in support of that legislation in determining the intention of the legislature. | The Tribunal found that the reason for the disposal or redemption of a traditional security, whether marketable or not, must be within paragraph (e) for subsection 70B(4) to apply. If the traditional security is a marketable security, paragraphs (c) and (d) must also be considered. | Further, the Tribunal found that paragraphs (c) and (d) of subsection 70B(4) are conjunctive rather than disjunctive for a specific purpose. That purpose is that both the acquisition and the sale of a marketable security must be on the securities market. If the marketable security is not acquired on the securities market, it must be open to be acquired in the ordinary course of trading on a securities market. The Tribunal held that the failure to dispose of a marketable security other than on the market gives rise to the potential for the perpetration of a mischief being the artificial creation of a loss on the disposal which is other than at arms length. | The Tribunal held that in order to obtain the deduction for the loss, the taxpayer must have disposed of the marketable securities on the open market. By virtue of the fact that the taxpayer did not dispose of the convertible notes on the open market, the deduction under subsection 70B(2) is not available due to the operation of subsection 70B(4).

Issues decided:
The Tribunal found that subsection 70B(4) of the ITAA 1936 operated to deny the taxpayer a deduction under subsection 70B(2) because the convertible notes disposed of by the taxpayer, being marketable securities, were not disposed of in the ordinary course of trading on a securities market. The taxpayer argued that since it was open for her to acquire identical securities in the course of ordinary trading on the securities market, subparagraph 70B(4)(c)(ii) was not met and therefore subsection 70B(4) does not operate to remove the deduction available under subsection 70B(2). The Tribunal rejected the taxpayer's argument for a literal interpretation of subsection 70B(4) of the ITAA 1936, and adopted a purposive approach since a literal interpretation of the subsection would not achieve the intention of the legislature. Having regard to sections 15AA and 15AB of the Acts Interpretation Act 1901 and the High Court authorities of CIC Insurance Limited v Bankstown Football Limited (1995 ) 187 CLR 384 and others, the Tribunal determined that it was appropriate for it to consider extrinsic material which included the Explanatory Memorandum and the Second Reading Speech in support of that legislation in determining the intention of the legislature. The Tribunal found that the reason for the disposal or redemption of a traditional security, whether marketable or not, must be within paragraph (e) for subsection 70B(4) to apply. If the traditional security is a marketable security, paragraphs (c) and (d) must also be considered. Further, the Tribunal found that paragraphs (c) and (d) of subsection 70B(4) are conjunctive rather than disjunctive for a specific purpose. That purpose is that both the acquisition and the sale of a marketable security must be on the securities market. If the marketable security is not acquired on the securities market, it must be open to be acquired in the ordinary course of trading on a securities market. The Tribunal held that the failure to dispose of a marketable security other than on the market gives rise to the potential for the perpetration of a mischief being the artificial creation of a loss on the disposal which is other than at arms length. The Tribunal held that in order to obtain the deduction for the loss, the taxpayer must have disposed of the marketable securities on the open market. By virtue of the fact that the taxpayer did not dispose of the convertible notes on the open market, the deduction under subsection 70B(2) is not available due to the operation of subsection 70B(4).

ATO view of decision:
The Tax Office considers the effect of the decision is that: • if a traditional security is not marketable security and a paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) as subsection 70B(4) applies. The Tribunal held that once the purpose of the disposal is in accordance with paragraph (e), the deduction is not available because the security cannot be disposed of on the market. • if a traditional security is a marketable security and paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) unless both the acquisition and sale of the marketable security took place on the open market, or in the case of the acquisition of the security, an identical security could be acquired in the ordinary course of trading on a securities market. • Subsections 70B(4)(c) and (d) should be read conjunctively rather than disjunctively. • The failure to dispose of a marketable security other than on the market means that a deduction is not available under subsection 70B(2) as subsection 70B(4) applies. | • if a traditional security is not marketable security and a paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) as subsection 70B(4) applies. The Tribunal held that once the purpose of the disposal is in accordance with paragraph (e), the deduction is not available because the security cannot be disposed of on the market. • if a traditional security is a marketable security and paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) unless both the acquisition and sale of the marketable security took place on the open market, or in the case of the acquisition of the security, an identical security could be acquired in the ordinary course of trading on a securities market. • Subsections 70B(4)(c) and (d) should be read conjunctively rather than disjunctively. • The failure to dispose of a marketable security other than on the market means that a deduction is not available under subsection 70B(2) as subsection 70B(4) applies.

Administrative treatment:
The Commissioner considers that this case confirms his view on the interpretation of subsection 70B(4) ITAA 1936 and will be applied in any case with similar facts. | Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1936 ('ITAA 1936') 70B(1) 70B(2) 70B(4) 70B(7) 159GP(1) Acts Interpretation Act 1901 15AA 15AB Taxation Laws Amendment Act (No.5) 1992
Case references: Mills v Meeking and Another [1990] HCA 6 169 CLR 214 91 ALR 16 CIC Insurance Limited v Bankstown Football Club Limited [1997] HCA 2 187 CLR 384 141 ALR 618 Newcastle City Council v GIO General Limited [1997] HCA 53 191 CLR 85 149 ALR 623 Re Australian Federation of Construction Contractors: Ex parte Billing [1986] HCA 74 68 ALR 416
Subject references: Disposal of convertible notes after company placed in receivership Whether loss deductible from assessable income Whether convertible notes a traditional or a marketable security Whether convertible notes acquired in the ordinary course of trading on a securities market Statutory interpretation - section 70B of the Income Tax Assessment Act 1936 ('ITAA 1936')
Other references: ATO ID 2006/214