VBK and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (VT 2005/346)
Judgment date: 21 July 2006
Date published: 27 October 2006

Summary of decision:

Overview of facts:
1. In the 2000 financial year the taxpayer, a shareholder of Harris Scarfe Holdings Ltd (HSL) 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 early 2001, HSL was placed in voluntary administration. The taxpayer received two offers to purchase the notes (both of which would have resulted in substantial losses). | 3. A ruling was provided on the following questions: a. in the event that the rulee accepts an offer and sells the securities, will the disposal of the securities give rise to a revenue loss under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936) in the year of disposal?; and b. Does the purchase cost ($5,433.54) of the rights to buy a further 534,044 convertible notes give rise to a revenue loss under section 70B of the ITAA 1936 in the year of disposal? | a. in the event that the rulee accepts an offer and sells the securities, will the disposal of the securities give rise to a revenue loss under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936) in the year of disposal?; and b. Does the purchase cost ($5,433.54) of the rights to buy a further 534,044 convertible notes give rise to a revenue loss under section 70B of the ITAA 1936 in the year of disposal? | 4. Both questions were answered in the negative. The taxpayer objected to the ruling, and the Commissioner disallowed the objection. | 5. Subsequent to the private ruling being made, but before giving notice of objection to it, the applicant accepted a third offer, not contemplated in the ruling request to transfer the convertible notes for a consideration of $1,000. | 6. The taxpayer then sought a review by the Administrative Appeals Tribunal. | 7. The relevant statutory provisions under consideration in this ruling request included sub sections 70B(1), s 70B(2), s 70B(4) and s 70B(7) of the ITAA 1936. The Commissioner and the taxpayer were agreed on the application of the law to the facts in many respects, however the case proceeded on the following areas of contention in respect of paragraphs 70B(4)(c) and 70B(4)(d): (a) Whether the taxpayer acquired the notes in the ordinary course of trading on a securities market (sub paragraph 70B(4)(c)(i)); (b) Whether at the time the taxpayer acquired the notes, it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market (sub paragraph 70B(4)(c)(ii)); and (c) Whether if either offer were to be accepted, the disposal of the Notes would take place in the ordinary course of trading on a securities market (paragraph 70B(4)(d)). | (a) Whether the taxpayer acquired the notes in the ordinary course of trading on a securities market (sub paragraph 70B(4)(c)(i)); (b) Whether at the time the taxpayer acquired the notes, it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market (sub paragraph 70B(4)(c)(ii)); and (c) Whether if either offer were to be accepted, the disposal of the Notes would take place in the ordinary course of trading on a securities market (paragraph 70B(4)(d)). | Issues decided by the court or tribunal | 1. The Tribunal found that the notes were acquired in part by the exercise of the taxpayer's rights as a shareholder in the company and in part by the exercise of similar rights acquired on the stock exchange. In each case the acquisition of the notes resulted from a transaction entered into between the taxpayer and the company and not in the ordinary course of trading on a securities market for the purposes of sub para. 70B(4)(c)(i). | 2. The Tribunal was unable to decide whether at the time the taxpayer acquired the notes it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market. The Tribunal remitted the ruling back to Commissioner to obtain necessary facts to answer the question raised by sub para. 70B(4)(c)(ii). | 3. The Tribunal also held that there was no basis upon which a finding could be made as to whether the disposal of the notes would involve the ordinary course of trading on a securities market for the purposes of para. 70B(4)(d). | 4. The Tribunal found that in the circumstances, it was not possible for the Commissioner to properly exercise his functions in relation to either the ruling or the objection without first seeking further information. Accordingly, the matter was remitted back to the Commissioner for further consideration.

Issues decided:
1. The Tribunal found that the notes were acquired in part by the exercise of the taxpayer's rights as a shareholder in the company and in part by the exercise of similar rights acquired on the stock exchange. In each case the acquisition of the notes resulted from a transaction entered into between the taxpayer and the company and not in the ordinary course of trading on a securities market for the purposes of sub para. 70B(4)(c)(i). 2. The Tribunal was unable to decide whether at the time the taxpayer acquired the notes it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market. The Tribunal remitted the ruling back to Commissioner to obtain necessary facts to answer the question raised by sub para. 70B(4)(c)(ii). 3. The Tribunal also held that there was no basis upon which a finding could be made as to whether the disposal of the notes would involve the ordinary course of trading on a securities market for the purposes of para. 70B(4)(d). 4. The Tribunal found that in the circumstances, it was not possible for the Commissioner to properly exercise his functions in relation to either the ruling or the objection without first seeking further information. Accordingly, the matter was remitted back to the Commissioner for further consideration.

ATO view of decision:
1. An acquisition of convertible notes resulting from a transaction entered into between a taxpayer and the issuing company is not in the ordinary course of trading on a securities market for the purposes of sub paragraph 70B(4)(c)(i).[Para. 8] | 2. There were no broader implications from this decision, which ultimately turned on the finding that there were insufficient facts to rule. "....it was not possible for the Commissioner to properly exercise his functions in relation either to the private ruling or the objection without first seeking further information as to the facts relevant to the application of s 70B(4)(c) and s 70B(4)(d) of the Income Tax Assessment Act 1936. In these circumstances it is appropriate that the matter be remitted to the Commissioner for further consideration." [Para 15] | 3. A new regime for private rulings applies from 1 January 2006 under Division 359 of the TAA 1953. Specifically, section 359-65 allows the Commissioner to consider additional information in determining the objection that was not considered when making the ruling.

Administrative treatment:
None. | Implications on current Public Rulings & Determinations | None.

Legislative references: Taxation Administration Act 1953 14ZAG 14ZZK(b)(iii) Part IVAA (repealed) 14ZAA (repealed) 14ZAB (repealed) 14ZAC (repealed) 14ZAD (repealed) 14ZAE (repealed) 14ZAF (repealed) 14ZAG (repealed) 14ZAH (repealed) 14ZAHA (repealed) 14ZAI (repealed) 14ZAJ (repealed) 14ZAK (repealed) 14ZAL (repealed) 14ZAM (repealed) 14ZAN (repealed) 14ZAO (repealed) 14ZAP (repealed) 14ZAQ (repealed) 14ZAR (repealed) 14ZAS (repealed) 14ZAT (repealed) 14ZAU (repealed) 14ZAV (repealed) 14ZAW (repealed) 14ZAX (repealed) 14ZAXA (repealed) 14ZAY (repealed) 14ZAZ (repealed) 14ZAZA (repealed) 14ZAZB (repealed) 14ZAZC (repealed) Income Tax Assessment Act 1936 (ITAA 1936) 26BB 70B(1) 70B(2) 70B(4) 70B(7) 159GP(1) Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005 (Improvements to Self Assessment Act) the Act Administrative Appeals Tribunal Act 1975 43(1)(c)(ii)
Subject references: TAXATION deduction for loss on disposal of traditional securities request for private ruling inadequacy of information available to Commissioner power to request further information Commissioner's obligation to request further information