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CASE 10/2006

Members:
H Olney DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 645

Decision date: 21 July 2006

H Olney AM QC (Deputy President)

1. The applicant (the taxpayer) seeks review of a decision by the respondent (the Commissioner) to disallow an objection to a private ruling made pursuant to s 14ZAG of the Taxation Administration Act 1953.

2. By a letter dated 20 September 2004, accountants representing the taxpayer requested a private ruling concerning the correct taxation treatment of the then contemplated disposal of certain Convertible Notes (the Notes) owned by the taxpayer in the event that the taxpayer should accept either of two offers that had been made in relation to the Notes. On 13 December 2004 the Commissioner made a ruling unfavourable to the taxpayer and subsequently on 28 April 2005, following the taxpayer's objection to the ruling, disallowed the objection. On 24 June 2005 the taxpayer applied to the Tribunal for review of the objection decision.

3. It is settled law that in reviewing a decision of the Commissioner to disallow a taxpayer's objection to a private ruling, the Tribunal is confined to the set of facts that constituted the arrangement identified in the private ruling (
Federal Commissioner of Taxation v Mc Mahon (1997) 79 FCR 127;
Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 154). The taxpayer has the burden of proving that the decision under review should not have been made or should have been made differently (Taxation Administration Act 1953, s 14ZZK(b)(iii)).

4. The factual background of the arrangement in respect of which the private ruling was sought was set out in the letter of 20 September 2004 in which the request for a

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private ruling was made. As expressed in the letter the facts are:
  • "• During the 2000 financial year, Harris Scarfe Holdings Ltd ('HSL') issued a total or 10.7M Convertible Notes to raise capital of just under $15M. Existing shareholders received an entitlement to take up 1 Convertible Note for every 8 Ordinary shares they held.
  • • As the owner of 478,986 HSL ordinary shares at the time, the taxpayer was entitled to acquire 59,873 Convertible Notes for $1.40 each, which she did.
  • • Prior to 30 June 2000, the taxpayer also acquired (on the market) the rights to buy a further 534,044 Convertible Notes. The purchase consideration for the rights was $5,433.54 and the consideration for the 534,044 Convertible Notes was $747,661.60.
  • • The taxpayer's total purchase cost of the 593,917 Notes was $831,483.80.
  • • The terms and conditions of the HSL Convertible Notes at the time of issue were as follows:
    Issue price: $1.40
    Issue date: 30 June 2000
    Maturity date: 31 July 2005
    Conversion: 1 for 1 basis into ordinary shares in HSL.
    Conversion date: Any time up to 1 July 2005
    Interest on notes: The higher of 9% per annum or the 5 year swap rate + 1.5%
    Interest payment dates: 1 January and 1 July each year.
  • • HSL was placed into voluntary administration in early 2001. A number of key events followed the appointment of the company's administrators, including:
    03/04/01: Securities of the company suspended from trading on the ASX
    06/04/01: Company placed in receivership and receivers and managers appointed.
    03/01/02: Resolution passed to wind up the company.
    15/03/02: The receivers and managers launched a $70m damages claim against the company's former auditors.
    22/01/03: The liquidators confirmed that the receivers and managers were still quantifying the various companies' legal claims against third parties.
    30/06/03: The liquidators issued a declaration that a return to shareholders was unlikely and therefore any capital loss for shareholders could now be claimed on the cost of the ordinary shares in the company. The liquidator's declaration does not apply to the noteholders who rank as unsecured creditors.
  • • Any likelihood of the Convertible Noteholders receiving a return on their investment rests largely with the action against the auditors. While it is possible that a successful action against the auditors may see funds available to be paid to creditors, the Convertible Noteholders rank as unsecured creditors and may not receive any return at all, even if the action is successful.
  • • Two offers have recently been made to the taxpayer to acquire her interest in the HSL Convertible Notes. The first offer has been made by the business deListed.com.au ('deListed') to all HSL Convertible Noteholders for consideration of one cent.

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    The second offer has been made by Salomon Smith Barney on behalf of a private investor group. We understand that this offer is for 0.8 cents per security.
  • • The taxpayer is currently considering both of these offers. Prior to making a decision, the taxpayer would like to confirm the taxation treatment of the loss that would be incurred on disposal under both offers."

(Subsequent to the private ruling but before giving notice of objection to the private ruling, the taxpayer accepted an offer made through Salomon Smith Barney to transfer the Notes to Halcyon One Pty Ltd for a consideration of $1,000).

5. The taxpayer requested the respondent to rule on the following issues:

  • "1 Should the taxpayer accept either of the purchase offers, will the disposal of the Convertible Notes give rise to a revenue loss under Section 70B of the Income Tax Assessment Act (1936) in the year of disposal?; and
  • 2 How is the consideration paid for the rights (cost $5,433.54) to be treated in the event that one of the purchase offers is accepted?"

In the notice of private ruling issued on 13 December 2004, (and subsequently in reasons for decision given following the taxpayer's objection against the private ruling) the questions posed by the taxpayer upon which the ruling was sought were recast and expressed in these terms:

  • "1. 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?
  • 2. 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?"

Both questions were answered in the negative.

6. For present purposes, the relevant statutory provisions are s 70B(1), s 70B(2), s 70B(4) and s 70B(7) of the Income Tax Assessment Act 1936 which provide:

"s 70B

  • (1) Expressions used in this section that are also used in section 26BB have the same meanings in this section as in section 26BB.
  • (2) 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 from the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place.

  • …

  • (4) If:
    • (a) a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed; and
    • (b) there is a loss on the disposal or redemption; and
    • (c) in the case of a disposal or redemption of a marketable security:
      • (i) the taxpayer did not acquire the security in the ordinary course of trading on a securities market; and
      • (ii) at the time the taxpayer acquired the security, it was not open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market; and
    • (d) in the case of a disposal of a marketable security - the disposal did not take place in the ordinary course of trading on a securities market; and
    • (e) having regard to:
      • (i) the financial position of the issuer of the security; and
      • (ii) perceptions of the financial position of the issuer of the security; and
      • (iii) other relevant matters;

      • it would be concluded that the disposal or redemption took place for the reason, or for reasons that included the reason, that there was an apprehension or belief that the issuer was, or would be likely to be, unable or unwilling to

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        discharge all liability to pay amounts under the security;

    • a deduction is not allowable to the taxpayer under this section in respect of so much of the amount of the loss as is a loss of capital or a loss of a capital nature.

  • …

  • (7) In this section:

  • issuer , in relation to a security at a particular time, means the person who, if the amount or amounts payable under the security were due and payable at that time, would be liable to pay the amount or amounts.

  • marketable security means a traditional security that is covered by paragraph (a) of the definition of security in subsection 159GP(1).

  • securities market means a market, exchange or other place at which, or a facility by means of which, offers to sell, purchase or exchange marketable securities are regularly made or accepted."

The parties agree that the Notes are a traditional security as defined in s 26BB (1) and that they are a marketable security within the definition in s 70B(7); and further, that as a matter of construction a deduction will not be denied to a taxpayer if the circumstances of the particular case fall outside of any one of the paragraphs of s 70B(4).

7. The parties are not in dispute as to the following matters:

  • (a) the acceptance of either of the offers in relation to the Notes would amount to a disposal of the Notes;
  • (b) such a disposal of the Notes would result in a loss to the taxpayer;
  • (c) the circumstances of the case would give rise to the conclusion referred to in s 70B(4)(e); and
  • (d) the taxpayer's loss would be a loss of capital or a loss of a capital nature.

The matters in contention between the parties concern the provisions of s 70B(4)(c) and s 70B(4)(d) namely:

  • (a) Whether the taxpayer acquired the Notes in the ordinary course of trading on a securities market (s 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 (s 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 (s 70B(4)(d)).

Each of these matters involves a question of fact which, given the nature of the proceeding, must be resolved from the material placed before the original decision maker and on which the private ruling was based.

8. The facts as stated by the taxpayer indicate 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. In these circumstances the provisions of s 70B(4)(c)(i) apply.

9. In the context of s 70B(4)(c)(ii), the taxpayer's application for a private ruling asserts:

The Harris Scarfe rights and Convertible Notes were listed on the Australian Stock Exchange and were able to be acquired by any member of the general public…

and although there is no doubt that at the time the application was prepared this statement was accurate in that at some previous time the rights and the Notes had been listed on the Australian Stock Exchange, it does not directly address the first issue raised in s 70B(4)(c)(ii) namely the circumstances that existed at the time the taxpayer acquired the security. To make a meaningful response to s 70B(4)(c)(ii) it is necessary to know first when the taxpayer acquired the Notes and second, whether at that time it was open to the taxpayer to acquire the same securities in the ordinary course of trading on a securities market.

10. The statement of facts in the taxpayer's application for a private ruling indicates that the

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Notes were issued during the 2000 financial year and that their issue date was 30 June 2000. There is a strong inference to be drawn from these assertions that the Notes were effectively acquired on their issue date, 30 June 2000. What does not appear from the facts put in support of the private ruling is whether on that date it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market. This is an issue fundamental to the application of s 70B(4)(c)(ii).

11. The matter raised in the previous paragraph did not escape the attention of the Commissioner's solicitor in the period leading up to the hearing of this application although it had not been adverted to in either the explanation of the private ruling or in the Commissioner's reasons for decision on the objection application. However, on 20 April 2006 the Commissioner's solicitor wrote to the District Registrar of the Tribunal:

Commissioner of Taxation -ats- VBK

Application to Administrative Appeals Tribunal No. VT2005/346

  • 1. We refer to the Application listed for hearing on 1 June 2006 at 10:00am.
  • 2. On behalf of the Respondent, we wish to bring an issue to the attention of the Administrative Appeals Tribunal ( Tribunal ). We have previously raised this issue with the Applicant and will copy this letter to the Applicant.
  • 3. The Applicant is seeking a review of the Respondent's decision to disallow the Applicant's objection against a private ruling ( Ruling ) in relation to section 70B of the Income Tax Assessment Act 1936.
  • 4. In our view, there is some doubt about whether, at the time the Respondent made the Ruling, there was sufficient information before the Respondent about the facts in order to give a ruling. Our concern relates to section 70B(4)(c)(i) and (ii).
  • 5. For example, section 70B(4)(c)(ii) raises a question about "the time the taxpayer acquired the security" and whether or not it was "open to the taxpayer [at that time] to acquire an identical security in the ordinary course of trading on a securities market". The Respondent formed a view about what is meant by "the ordinary course of trading on a securities market" and ruled accordingly.
  • 6. As part of its review, the Tribunal might consider that regard must also be had to what was open on a securities market at the time the Applicant acquired the securities and there is not, in our view, sufficient information in the Applicant's Request for Private Ruling as to what was open on a securities market at the time the Applicant acquired the securities.
  • 7. In that event, the Tribunal might decide to remit the matter back to the Respondent to exercise his powers under section 14ZAM of the Taxation Administration Act 1953 to obtain further facts. That was a course which was adopted by the Full Court of the Federal Court in
    CTC Resources NL v FC of T (1994) 120 ALR 192.
  • 8. As mentioned, we have previously raised this issue with the Applicant and we understand that the Applicant wishes to proceed with the Application.
  • 9. As respondent in the proceeding and having regard to section 33(1AA) of the Administrative Appeals Tribunal Act 1953, we consider it appropriate to bring this issue to the attention of the Tribunal as it may assist the Tribunal in reaching the correct and preferable decision.

12. The point raised in the Commissioner's solicitor's letter has merit but whether or not it is appropriate to take the step advocated in paragraph 7 of the letter will depend upon whether any useful purpose would be served by such action. It is desirable that consideration be given to the issue raised by s 70B(4)(d) before any conclusion is reached.

13. Section 70B(4)(d) relates to the disposal of a marketable security and calls for a determination as to whether or not the disposal took place in the ordinary course of trading on a securities market. At the time the application for a private ruling was made there had been no disposal although two alternative disposals were under consideration. Subsequent to the private ruling the taxpayer accepted an offer

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made through Salomon Smith Barney to transfer the Notes for $1,000. Once this had occurred it was no longer relevant to give any consideration to the offer made by the business deListed.com.au. The second offer referred to in the application for private ruling was said to have been made by Salomon Smith Barney on behalf of a private investor group to purchase the Notes at 0.8 cents per security. Acceptance of this offer (assuming all Notes held by the taxpayer were sold) would have yielded approximately $4,750. It is clear that the offer finally accepted, although introduced through the same firm of brokers, was not the offer referred to in the application for private ruling. Whether or not the ultimate purchaser of the Notes was the same private investor group referred to in the application for private ruling is probably not important but what is important is that the Notes have been disposed of and that the taxation treatment of the loss sustained by the taxpayer by reason of the disposal will be governed (at least as far as s 70B(4)(d) is concerned) by whether or not the disposal took place in the ordinary course of trading on a securities market and that is not a matter currently before the Tribunal for consideration.

14. The primary question upon which the taxpayer sought a private ruling was:

Should the taxpayer accept either of the purchase offers, will the disposal of the Convertible Notes give rise to a revenue loss under Section 70B of the Income Tax Assessment Act (1936) in the year of disposal?

The purchase offers referred to were first that made through deListed.com.au for one cent per security and second, that made through Salomon Smith Barney for 0.8 cents per security. Neither offer was ultimately accepted. Subsequent to the private ruling (13 December 2004) but before lodging an objection to the private ruling (21 March 2005) the taxpayer accepted an offer for the Notes and on 10 February 2005 transferred them for a consideration of $1,000. The taxpayer's notice of objection against the private ruling (dated 21 March 2005) disclosed that: Subsequent to the initial ruling application, the taxpayer has now accepted an offer made through Salomon Smith Barney. It is significant that this statement refers to an offer and not the offer which the taxpayer had previously indicated was under consideration. In dealing with the objection to the private ruling the Commissioner had no information available upon which to reach a conclusion as to whether the original Salomon Smith Barney offer and the subsequent offer were (apart form the consideration offered) essentially the same and in particular 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.

15. At the time the application for a private ruling was under consideration by the Commissioner, and again when the taxpayer's objection to the private ruling was being dealt with, it was open to the Commissioner to exercise the power conferred by s 14ZAM of the Taxation Administration Act 1953 to request the taxpayer to provide further information. That section provided:

"14ZAM If the Commissioner considers that:

  • (a) a private ruling cannot be made without further information; and
  • (b) if that information were given, there would be no reason for the Commissioner not to comply with the application for the ruling;

the Commissioner must request the applicant to give that information to the Commissioner."

The Tribunal is of the view that in the circumstances of the particular case 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.

16. Part IVAA of the Taxation Administration Act 1953 (s 14ZAA to s 14ZAZC) was repealed with effect from 1 January 2006 by the Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005. The Tribunal is of the view that transitional provisions applicable to pending applications would have the effect of enabling

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the Commissioner to request the taxpayer to provide whatever further information the Commissioner may consider necessary to enable him to exercise his functions in relation to the taxpayer's application for a private ruling.

Decision

17. Having regard to the foregoing matters the Tribunal proposes to exercise its power under s 43(1)(c)(ii) of the Administrative Appeals Tribunal Act 1975. The decision of the Tribunal is that the decision under review is set aside and the matter is remitted to the Commissioner for reconsideration according to law.


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