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25 May 09 Traditional securities: deduction for loss on disposal of convertible notes disallowed - WRBD

The AAT has held that a loss incurred on the disposal of convertible notes was not deductible under s 70B ITAA 1936, which provides for the deduction of losses sustained on the disposal or redemption of traditional securities. The taxpayer, a shareholder in the company which issued the notes, had acquired the notes at the time of issue. The notes were tradeable on the ASX. The company subsequently went into voluntary administration and then into liquidation. The taxpayer disposed of the convertible notes in an off-market transfer, incurring a considerable loss.

Following an examination of extrinsic material relating to the enactment of s 70B, the AAT concluded that s 70B(4) operated to deny a deduction for the loss incurred on the disposal of the notes. Section 70B(4) becomes relevant when the reason, or one reason, for the disposal of securities is that there was an apprehension or belief that the issuer was, or would be likely to be, unable or unwilling to discharge all liability to pay amounts under the security. If that has been established, the next question is whether the security is a marketable security. If it is a marketable security, the deduction is available from income in the relevant year only if the acquisition and disposal of the security both took place on the open market or, in the case of the acquisition of the security, an identical security could have been purchased on the open market. If the security is not marketable, on the application of s 70B(4)(e) the deduction is not available. The purpose of the section is that, for a loss on disposal to be deductible, both the acquisition and sale of a marketable security must be on the market, provided that the acquisition need not be on the market in the event that an identical security was able to be acquired in the ordinary course of trading on a securities market. In particular, the failure to dispose of a marketable security other than on the market gives rise to the potential for the perpetration of a mischief, namely, the artificial creation of a loss on the disposal which is other than at arm's length. In this case, the notes disposed of by the taxpayer being marketable securities and not having been disposed of on the market, s 70B(4) operated to deny the deduction claimed: Re WRBD and FCT [2009] AATA 368 (AAT, Mushin J Presidential Member, B H Pascoe Member, 20 May 2009).

For a copy of the decision, go here.

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