Private ruling: Traditional securities
Date of advice: 25 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and answers: | 1. Are the securities that you purchased a traditional security for the purposes of Section 26BB of the ITAA 1936? | Yes. | 2. Are you entitled to a deduction for the loss that resulted from the disposal of your tradition securities? | Yes. | 3. Are you entitled to disregard any capital gain or loss that results from the disposal of your traditional securities? | No.

Relevant facts and circumstances: You were a foreign resident for income tax purposes. You purchased a number of foreign securities. At maturity the security matures and the issuer honours the obligation to pay the promised amount, at this point the security will have been redeemed by the issuer. The securities were purchased via a secondary market. A number of years later you became a resident of Australia for income tax purposes. A number of years later you disposed of the securities via a secondary market to a third party. There was no particular reason for their disposal.

Relevant legislative provisions: Section 118.20 of the Income Tax Assessment Act 1997 | Section 136-40 of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Section 108-5 of the Income Tax Assessment Act 1997 | Section 102-20 of the Income Tax Assessment Act 1997 | Section 26BB of the Income Tax Assessment Act 1936 | Section 70B of the Income Tax Assessment Act 1936

Reasons for decision: Detailed Reasoning - Traditional securities: The term 'traditional security' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as having the meaning given by section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936). That section broadly provides that a traditional security is a security: 1. acquired after 10 May 1989; 2. that is not a 'prescribed security' (i.e. Commonwealth securities that do not bear interest); 3. that is not trading stock of the taxpayer; and 4. that does not have an 'eligible return', or where it does have an eligible return, it must not exceed the prescribed level. It is considered that your securities are traditional securities for the following reasons: • they were acquired after 10 May 1989, • they do not have a deferred income element, and • they do not fall under any other of the exclusions contained in the definition. Accordingly, as the securities that you have purchased satisfy the above conditions, they are traditional securities under section 26BB of the ITAA 1936. | Detailed Reasoning - Allowable deductions: Subsection 70B(2) of the ITAA 1936 provides that where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any loss on the disposal or redemption is allowable as a deduction. The deduction is allowable from the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place. Subsections 70B(2A), 70B(2B), 70B(2C), 70B(3) and 70B(4) of the ITAA 1936 operates to deny a deduction for any losses incurred on the disposal of a traditional security where provisions contained within these subsections are satisfied. In your case, it has been established that your securities are traditional securities. They are not segregated assets of an insurance company or a complying superfund and were not converted into ordinary shares in a company. The transactions were conducted at arm's length, the securities were acquired in the ordinary course of trading on the securities market and the disposal did not take place to due to any of the motives listed under subsection 70B(4)(e). Therefore subsections 70B(2A), 70B(2B), 70B(2C), 70B(3) and 70B(4) of the ITAA 1936 will not operate to deny you a deduction for any losses that resulted from the disposal of your tradition securities. Accordingly you are entitled to a deduction for the losses incurred on the disposal of your securities under subsection 70(B) of the ITAA 1936. | Detailed Reasoning - Capital gains: Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss arises if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. A traditional security is a CGT asset. The most common CGT event happens if you dispose of an asset to someone else. The disposal of a CGT asset causes a CGT event A1 to happen under section 104-10 of the ITAA 1997. Gains and losses that result from the disposal or redemption of traditional securities are subject to the CGT rules. Under subsection 104-10(4) of the ITAA 1997 you make a capital gain from a CGT event if the capital proceeds from the disposal are more than the asset's cost base. Under section 136-40 of the ITAA 1997, the first element of your cost base for your securities will be the market value of your securities at the time you became an Australian resident. From the information that you have provided, you purchased your securities while you were a foreign resident. After a number of years you became a resident of Australia for tax purposes. On the date you became a resident, hence the market value of your securities at this date will be the first element of your cost base. A number of years later, you disposed of your securities and realised a capital gain. Provided you satisfy the conditions outlined under section 105-5 of the ITAA 1997, you are entitled to apply a 50% discount to your capital gain. Accordingly, you are required to include this capital gain in your income tax return. | Detailed Reasoning - Anti-overlap provisions: Section 118-20 of the ITAA 1997 contains anti-overlap provisions. These provisions apply to preclude any gain from being assessable under both ordinary income provisions and statutory income provisions; however section 118-20 of the ITAA 1997 only reduces the amount assessable as a Capital Gain by the amount of income included as assessable income by another section of the law. In your case no other income has been included, as under the traditional security provisions a deduction is allowable. Your situation is unusual as the assessability of traditional securities is not affected by your change in residency status whereas the Capital Gains regime only considered the change in value while you were a tax resident of Australia.