Private ruling: Traditional security
Published: July 2012
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2008

Ruling: Q1: Does the acquisition of the business property constitute a disposal or redemption for the purposes of section 70B Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Is the security over a loan that is a traditional security consideration for the disposal or redemption of the loan for the purposes of section 70B of the ITAA 1936? | A2: No.

Relevant facts and circumstances: Your business was sold as a going concern on vendors terms loan. Security for the loan was the business assets which reside with you until the loan is repaid in full. For the first 18 months of the loan, the repayments were being made. The purchaser then abandoned the business leaving you responsible for the property in the business per the contract of sale. There was no communication between you and the purchaser in regards to the takeover of the business. The purchaser defaulted on the loan and you took over the business and assets. You had no knowledge that the creditor was unable or unwilling to pay the loan off. You have not taken any action to recover the amounts owed to you by the purchaser. As the purchaser has no other assets you will not make further efforts to recover the balance of the loan and regard the forfeiture of the equipment as final consideration payable by the purchaser.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 70B | Income Tax Assessment Act 1936 subsection 26BB(1)

Reasons for decision: Summary: Traditional securities for the purposes of subsection 26BB(1) of the ITAA 1936 are defined at paragraph 17 of Taxation Ruling TR 96/14 as; · stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security; · a deposit with a bank, building society or other financial institution; · a secured or unsecured loan; or · any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.' The acquisition of business property does not meet the definition of traditional security. In your circumstances retaining ownership of the business property does not constitute a disposal or redemption for the purposes of section 70B of the ITAA 1936. However a secured or unsecured loan is considered a traditional security for the purposes of subsection 26BB(1) of the ITAA 1936. Section 70B of the ITAA 1936 states where a taxpayer disposes of a traditional security, the amount of any loss on the disposal is allowable as a deduction from the assessable income of the taxpayer of the year of income in which the disposal takes place. The word 'dispose' is defined in subsection 26BB(1) of the ITAA 1936 as follows: '" dispose ", in relation to a security, means sell, transfer, assign or dispose of in any way the security or the right to receive payment of the amount or amounts payable under the security.' The Commissioners view on traditional securities is found in Taxation Ruling TR 96/14. Paragraphs 4(iv) and 14 of TR 96/14 state the forgiveness or waiver of a debt that is a traditional security does not constitute a disposal of the security for the purposes of the traditional securities provisions. This view is supported by Purvis J in Case 23 95 ATC 249 at 256; Case 10,116 (1995) 30 ATR 1269 at 1277, where he held that: 'It is clear then that the meaning to be ascribed to the words "dispose of" is one consistent with alienation. The words "sell", "transfer" and "assign" all convey this sense of alienation. An extinguishment of a debt, will not then satisfy the definition of "disposal" for the purposes of s 70B.' Your contention that paragraph 61 of TR 96/14 allows a deduction under section 70B of the ITAA 1936 has been considered. Paragraph 61 requires the creditor to receive adequate consideration for the debt release if the debt waiver was to be effective. You maintained legal possession of the business property and therefore have not received any consideration for waiver making the waiver inadequate. Furthermore paragraph 61 is considered to be an alternative view and not a view accepted by the Commissioner. Also paragraph 62 of TR 96/14 explains that the debt waiver cannot constitute a disposal for the purposes of section 70B of the ITAA 1936. In your situation, a disposal has not occurred as forgiveness or waiver of a debt does not constitute a disposal of the security. Therefore, you cannot claim a deduction under section 70B of the ITAA 1936.

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