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CASE 3/2009

Members:
Mushin P
BH Pascoe M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2009] AATA 368

Decision date: 20 May 2009

Mushin J, BH Pascoe (Presidential Member, Member)

Introduction

1. The applicant applied to Harris Scarfe Holdings Ltd ("the company") for the issue of convertible notes in the company. Several days after that application was made, trading in those notes commenced on the Australian Stock Exchange ("the ASX") on deferred settlement terms. The first actual sales on the ASX took place several days later and shortly after that, the convertible notes were allotted to the applicant in accordance with the application.

2.

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Approximately nine months later, the company was suspended from trading on the ASX and was then placed in receivership. Subsequently, a resolution was passed winding up the company.

3. Later, the applicant disposed of a quantity of the convertible notes in an off-market transfer at a substantial loss.

4. The ultimate issue before the Tribunal is whether the applicant is entitled to a deduction from taxable income for the loss sustained by that disposition.

Background facts

5. The facts relevant to this matter are not, and cannot be, in contention. They are set out below.

6. During the financial year ending 30 June 2000, the company issued a prospectus seeking to raise capital through the issue of Convertible Notes ("the notes"). Pursuant to the prospectus, existing shareholders of the company received an entitlement of one note for every eight ordinary shares then held by the shareholder. At that time, the applicant owned 478,986 ordinary shares in the company, thereby entitling her to acquire 59,873 notes for $1.40 each. The applicant exercised that entitlement at a total cost of $83,822.20 ("the entitlement notes").

7. The applicant also purchased the rights to buy a further 534,044 Convertible Notes. The consideration for the purchase of those rights was $5,433.54. The consequent purchase of the notes, which took place after 3 July 2000, cost $747,661.60 ("the acquisition notes"). Accordingly, the applicant expended a total sum of $831,483.80 in the purchase of the entitlement notes and the acquisition notes.

8. The notes commenced trading on the ASX on 3 July 2000 on a deferred settlement basis and were allotted on 10 July 2000. Accordingly, a potential purchaser of the notes, who had neither an entitlement by virtue of being a shareholder nor had acquired the notes previously, was able to purchase them on the ASX from 3 July 2000. The deferred settlement terms ceased on 13 July 2000 and the notes continued to be listed on the ASX.

9. The terms and conditions of the notes as set out in the prospectus provided a maturity date of 31 July 2005. However, in early 2001 the company was placed into voluntary administration. Its securities were suspended from trading on the ASX on 3 April 2001 and it was placed into receivership with the appointment of receivers and managers on 6 April 2001. A resolution to wind up the company was passed on 3 January 2002.

10. In March 2002 receivers and managers launched a damages claim against the company's former auditors. In January 2003 liquidators confirmed that the receivers and managers were still quantifying the various companies' legal claims against third parties. On 30 June 2003 liquidators issued a declaration that a return to shareholders was unlikely, as a result of which any capital loss for shareholders could be claimed on the cost of the ordinary shares in the company. That declaration did not apply to the note-holders, of whom the applicant was one, who rank as unsecured creditors.

11. In his Statement of Facts and Contentions, Counsel for the applicant conceded at [1.10]:

"While it was possible that a successful action against the auditors could result in funds being available to be paid to creditors, the convertible noteholders ranked as unsecured creditors which could result in them not receiving any return at all, even in the event of a successful action."

12. On 10 December 2004, the applicant sold 500,000 notes for a total consideration of $1,000 in an off-market transfer to an unrelated third-party. Those notes comprised part of the acquisition notes. That sale resulted in a substantial loss to the applicant.

13. On 20 September 2004, prior to the sale referred to in the previous paragraph, the applicant by her accountants sought a Private Ruling from the respondent, which application was essentially on the same issue as that in the present matter, as to whether such a loss incurred on the disposal of the notes was deductible pursuant to the provisions of subsection 70B(2) of the Income Tax Assessment Act 1936 ("ITAA"). On 13 December 2004 the respondent ruled unfavourably to the applicant. The applicant objected to that ruling and on 28 April 2005 the respondent disallowed the objection.

14.

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On 24 June 2005, the applicant applied to the Tribunal for a review of the disallowance decision referred to in the previous paragraph. That review was heard by the Tribunal on 1 July 2006. The Tribunal decided that the respondent's decision be set aside and "the matter be remitted to the Commissioner for reconsideration according to law". It is not necessary to detail that decision here because it raised the same issues as are the subject of this matter.

15. On 21 May 2007, the applicant sought a further Private Ruling from the respondent. On 29 August 2007, the respondent issued a Notice of Private Ruling which held that the loss would not be deductible under that legislation.

16. On 23 October 2007, the applicant lodged an objection to the Notice of Private Ruling referred to in the previous paragraph. On 5 June 2008, the respondent disallowed the objection in full and provided reasons in accordance with the relevant legislation. Because of the nature of the application and the manner of its conduct before us, it is unnecessary to examine the reasons for the respondent's rejection of the applicant's Objection to the Notice of Private Ruling.

The application

17. On 17 July 2008, the applicant applied to the Tribunal for review of the respondent's decision referred to in the previous paragraph. The application asserted that -

"…the ATO has incorrectly applied the legislation contained in Section 70B of the Income Tax Assessment Act (1936), and in doing so has incorrectly characterised a revenue loss on the disposal of traditional securities as a capital loss."

18. The application is in respect of the financial years from that ending on 30 June 2005 and subsequent years to 30 June 2011 in respect of losses carried forward. The issues raised by the application are identical for each of those financial years.

The hearing

19. The hearing before us was conducted by Counsel for both parties including Senior Counsel for the respondent. Because the applicant seeks a review of the respondent's rejection of her Objection to the Notice of Private Ruling, the Tribunal is restricted to the facts relevant to that Ruling. Accordingly, no further evidence was sought to be adduced on behalf of either party.

20. Counsel made oral submissions in support of their respective contentions and also provided us with written submissions, all of which we have considered together with relevant documentation.

The legislation

21. The relevant legislation is contained in the ITAA. Subsection 26BB(2) which provides for the taxation of gains on the disposal or redemption of traditional securities, is in the following terms:

  • "(2) Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place."

22. Section 70B provides for the deduction of losses sustained on the disposal or redemption of traditional securities. Subsection 70B(4), which is at the heart of this matter, is in the following terms:

  • "(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

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        (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 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."

The parties' cases

23. As will be demonstrated below, the determination of this matter turns on an interpretation of subsection 70B(4) ("the subsection"). Counsel for the applicant submitted that on a literal interpretation of the subsection, which he contended was appropriate, the applicant should be granted the relief sought.

24. The contrary contention on behalf of the respondent conceded, at least inferentially, that a literal interpretation of the subsection created difficulties for the respondent. Counsel for the respondent submitted that we should instead read the subsection in a manner different to what appears to be its literal wording in order to establish the correctness of his client's resistance of the applicant's application. In support of that proposition, Counsel asserted that we should have resort to certain provisions of the Acts Interpretation Act 1901 ("the Interpretation Act"). We now turn to an examination of those competing propositions.

The applicant's case

25. The applicant's case commenced with the provisions of subsection 26BB(2) quoted above. It was common ground between the parties that the disposition of "a traditional security" which results in a loss of a type contemplated in that subsection would entitle the applicant to a deduction from her income for the relevant year. It was also common ground that the characterisation of the applicant's loss in this matter is governed by the subsection to which we now turn.

26. Counsel for the applicant submitted that the intent of the subsection is clear. The various paragraphs of the subsection are conjunctive rather than disjunctive by virtue of the use of the word "and" between each of those paragraphs and the words "a deduction is not allowable to the taxpayer" after paragraph (e) of the subsection being phrased in the negative. Accordingly, Counsel submitted that the applicant only needs to avoid one of the paragraphs of the subsection in order to qualify for the deduction.

27. Counsel for the applicant conceded that the applicant had disposed of a "traditional security" and that there had been a loss on that disposal. Accordingly, the applicant was within the provisions of paragraphs (a) and (b) of the subsection.

28. By virtue of his reliance on one paragraph of the subsection which is only relevant to a "marketable security", Counsel for the applicant effectively conceded that the notes were a marketable security.

29. Counsel for the applicant conceded that the applicant did not "acquire the security in the ordinary course of trading on a securities market" and therefore was within subparagraph (c)(i) of the subsection.

30. Counsel for the respondent conceded the submission on behalf of the applicant that the applicant had avoided the provisions of subparagraph (c)(ii) on the basis that it was "open to the taxpayer to acquire an identical security in the ordinary course of trading on the securities market". As a result, Counsel for the applicant submitted that arising from the interpretation of the subsection for which he contended, that should be the end of the matter and the applicant was entitled to the relief sought.

31. Counsel for the applicant conceded that the disposal of the notes "did not take place in the ordinary course of trading on a securities market". Accordingly, following the fact that the applicant's case was conducted on the basis that the notes were a marketable security, the applicant did not avoid paragraph (d) of the subsection.

32. Counsel for the applicant also conceded that the applicant could not avoid the provisions of paragraph (e), in that at least part of the

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reason for the disposal of the notes entailed "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".

The respondent's case

33. The essence of the submissions on behalf of the respondent is that a literal interpretation of the subsection does not achieve the appropriate result in this matter in accordance with the intention of the legislature. To that end, Counsel for the respondent sought to rely on extrinsic material to interpret the intention of the legislature, using as his basis for that approach the provisions of the Interpretation Act. As we will demonstrate below, Counsel submitted a way in which we should read the subsection to achieve that purpose and actually provided us with a proposed wording. We turn to a consideration of those propositions.

34. Section 15AA of the Interpretation Act is in the following terms:

"In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."

Counsel for the respondent submitted that that provision empowered the Tribunal to have regard to various extrinsic material to discern the purpose or object underlying the Act ….

35. Section 15AB of the Interpretation Act empowers the use of extrinsic material in statutory interpretation. Subsection (1) is in the following terms:

  • "(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
    • (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
    • (b) to determine the meaning of the provision when:
      • (i) the provision is ambiguous or obscure; or
      • (ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable."

36. Subsection 15AB(2) of the Interpretation Act specifies documents which "may be considered" pursuant to the earlier provision but "without limiting the generality of subsection (1) …" . It is not necessary to detail those documents.

37. Counsel for the respondent referred to a number of authorities in support of their submissions. In
Mills v Meeking and Another (1989) 169 CLR 214, the High Court of Australia considered a provision enacted by the Victorian Parliament. The interpretation of that section was in dispute in the proceedings and the Court considered the question of a departure from its literal meaning pursuant to the equivalent provision to section 15AA of the Interpretation Act. Dawson J held (at p 235 - references omitted):

"…The requirement that a court look to the purpose or object of the Act is thus more than an instruction to adopt the traditional mischief or purpose rule in preference to the literal rule of construction. The mischief or purpose rule required an ambiguity or inconsistency before a court could have regard to purpose:
Miller v The Commonwealth ….;
Wacal Developments Pty Ltd v Realty Developments Pty Ltd …. The approach required by s 35 needs no ambiguity or inconsistency; it allows a court to consider the purposes of an Act in determining whether there is more than one possible construction. Reference to the purposes may reveal that the draftsman has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and if it is possible as a matter of construction to repair the defect, then this must be done. However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to

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effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman. Section 35 requires a court to construe an Act, not to rewrite it, in the light of its purposes."

38. In
CIC Insurance Limited v Bankstown Football Club Limited (1995) 187 CLR 384, 408, the High Court held as follows (references omitted):

"…It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure … . Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy … . Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in
Isherwood v Butler Pollnow Pty Ltd … , if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent … ."

39. In
Newcastle City Council v GIO General Limited (1997) 191 CLR 85, 113, McHugh J, in reference to the consideration of extrinsic material, held (references omitted):

"Having identified the relevant extrinsic material and determined that it may be considered, the final question is, can the Court legitimately interpret s 40 to cover the policy in question in the present appeals?

Extrinsic material cannot be used to construe a legislative provision unless the construction of the provision suggested by that material is one that is 'reasonably open' … . Even if extrinsic material convincingly indicates the evil at which a section was aimed, it does not follow that the language of the section will always permit a construction that will remedy that evil. If the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of the section in a tortured and unrealistic manner to cover another set of circumstances. As Brennan CJ and I said in
IW v City of Perth …, even when a court adopts a purposive construction to remedial legislation it ' is not at liberty to give it a construction that is unreasonable or unnatural'.

Nevertheless, when the purpose of a legislative provision is clear, a court may be justified in giving the provision 'a strained construction' … to achieve that purpose provided that the construction is neither unreasonable nor unnatural. If the target of a legislative provision is clear, the court's duty is to ensure that it is hit rather than to record that it has been missed … . As a result, on rare occasions a court may be justified in treating a provision as containing additional words if those additional words will give effect to the legislative purpose. In
Jones v Wrotham Park Estates …, Lord Diplock said that three conditions must be met before a court can read words into legislation. First, the court must know the mischief with which the statute was dealing. Second, the court must be satisfied that by inadvertence Parliament had overlooked an eventuality which must be dealt with if the purpose of the legislation is to be achieved. Third, the court must be able to state with certainty what words Parliament would have used to overcome the omission if its attention had been drawn to the defect."

40. In reply, Counsel for the applicant referred us to
Re Australian Federation of Construction Contractors;
Ex parte Billing (1968) 68 ALR 416, 420. The High Court held:

"…Section 15AB of the Acts Interpretation Act 1901(Cth), as amended, does not permit recourse to that speech for the purpose of departing from the ordinary meaning of the

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text unless either the meaning of the provision to be construed is ambiguous or obscure or in its ordinary meaning leads to a result that is manifestly absurd or is unreasonable…"

Counsel submitted that there was no ambiguity or obscurity of the kind referred to in that quote. However, that authority precedes those which we have quoted earlier and which, in our view, have taken a broader approach to reliance on extrinsic material in statutory interpretation. Accordingly, we respectfully distinguish that authority from the later ones.

41. Having considered the sections of the Interpretation Act and the decisions of the High Court quoted above, we have determined that it is appropriate to consider the extrinsic material which Counsel for the respondent has submitted is relevant to our determination of this matter. We turn to that consideration. In doing so, we note that Counsel for the applicant did not submit that any single item of extrinsic material relied on by Counsel for the respondent should be excluded from that consideration.

42. The first item of extrinsic material is the Explanatory Memorandum accompanying the Taxation Laws Amendment Act (No. 3) 1989 pursuant to which tax gains and allowable deductions for losses on the disposal or redemption of traditional securities was removed from the capital gains tax provisions of the ITAA. We also note the Second Reading Speech of the Minister Assisting the Treasurer in support of that legislation at Australia, House of Representatives, Proof Hansard, 10 May 1989, p 2363.

43. On what appears to be 3 July 1992 or thereabouts, the Federal Treasurer issued a Press Release on the subject of "Claims for Tax Losses on Disposal of Traditional Securities." It stated:

"The Government will amend the law to make it clear that losses on disposal of traditional securities are not deductible for income tax purposes under section 70B of the Income Tax Assessment Act if the losses are of capital, or of a capital nature.

The Commissioner of Taxation has informed the Government that section 70B deductions are being sought for capital losses caused by failures of financial institutions and from loans between non-arm's length parties.

…

The capital gains provisions will also be amended to ensure that any losses of capital on disposal of traditional securities can be used to offset against a capital gain."

44. On 29 September 1992 an officer of the Commissioner of Taxation wrote to the Senior Assistant Parliamentary Counsel confirming a discussion between them with regard to the provisions of the proposed section 70B of the ITAA. The letter read in part:

"…

You may recall that there were three issues which we discussed, the definition of 'issuer', the need for paragraph (b) in the definition of 'securities market' and the possible introduction of a requirement that at the time of acquisition a 'marketable security' be 'tradeable'.

…

I suggested yesterday that the provisions have a requirement that the time of acquisition of the security, the security was either acquired on a 'securities market' or could have been acquired on a 'securities market', that is, it was a kind ordinarily traded in a securities market. That would exclude, for example, private bond and debenture issues but not those issued by financial institutions or public companies that would be traded in the market place. We consider that this is consistent with the notion of the character of a loss is derived from the circumstances of acquisition and not necessarily those surrounding the disposal.

My suggestion to you yesterday was to amend the definition of marketable security. You explained that such an approach produced a circularity to the definitions of 'marketable security' and 'securities market'. Another suggestion is to change paragraph 4(a) along the following lines:

in the case of a marketable security

  • (i) it was not acquired on a securities market and could not have been acquired on a securities market and

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    (ii) in the case where the marketable security was disposed of - the disposal did not take place in the normal course of trading on a securities market"

45. The letter quoted in the previous paragraph demonstrates an initial concern with regard to the wording of the subsection which was included in the ITAA by the Taxation Laws Amendment Act (No. 5) 1992 which received royal assent on 24 December 1992. The Explanatory Memorandum which was circulated in the Parliament in respect of the proposed legislation, included the following statement (p 56-57):

"…

However, claims for deductions under section 70B have been sought for losses of the capital amount of an investment that relates to the inability or unwillingness of the financial institution or other borrower to meet its obligations under the terms of security, that is, for capital losses due to default. Some capital losses in that category have been caused by failures of financial institutions and from the forgiveness of loans, the latter particularly in relation to inter group company loans or related partnership loans. In these kinds of circumstances, of course, there could be no corresponding assessable gain to which section 26BB could apply.

…

Section 70B is therefore being amended to ensure that capital losses on the disposal of a traditional security arising from the issuer's perceived inability or unwillingness to discharge payment obligations under the security are not deductible, nor losses incurred by waiving or releasing a debt [new subsections 70B(4) and 70B(5)].

There will be no such loss of deduction, however, in cases where the traditional security is a marketable security and the loss arises from a disposal that takes place in the ordinary course of trading on a securities market.

…

In other cases - that is, where the security is not sold routinely through a securities market - losses will not be deductible under section 70B if they are capital in nature and a reason for the disposal (or redemption) was an apprehension or belief (whether founded or unfounded) that the issuer of the security might default on its payment obligations under the security. That apprehension or belief could be based on the issuer's financial position or perceived financial position - whether or not such perceptions were generally held in the market place - or any other matter bearing on its likely ability or willingness to discharge its payment obligations [new paragraph 70B(4)(e)]. (Emphasis added)

…"

46. The Second Reading Speech in support of the Bill, delivered in the House of Representatives by the Minister Assisting the Treasurer on 15 October 1992 and replicated in the Senate, which added the subsection to section 70B, was in almost identical terms to the Explanatory Memorandum quoted in the previous paragraph. Australia, House of Representatives 1992, Proof Hansard, 10 October 1992, p 2320 recorded the reference to the amendment in the House of Representatives, part of which we quote as follows:

"…To achieve that effect, a deduction under section 70B will not be allowable for a capital loss where a reason for the disposal or redemption of the traditional security is an apprehension or belief that the issuer of the security may be unable or unwilling to discharge payment obligations under the security.

These loss production rules will not prevent a deduction being allowable under section 70B if the traditional security is one that is regularly traded on the stock exchange or other securities market, and the disposal takes place in the ordinary course of trading on the market…" (Emphasis added)

47. Finally, in our exposition of the respondent's case, we produce the subsection in accordance with the proposed amendments as submitted by Counsel for the respondent. In doing so, we have shown the proposed deletions by striking through the relevant words. The proposed words to be added are shown in bold type. The paragraphs are as follows:

  • "(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 or
    • (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 or
    • (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 of a traditional security (not being a marketable security) 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 discharge all liability to pay amounts under the security;

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    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."

Discussion

48. As previously stated, the essence of the submission on behalf of the applicant is that the applicant is entitled to deduct the loss on the sale of the acquisition notes from income in the event that only one of the subparagraphs of the subsection is avoided. In this matter, by virtue of the concession on behalf of the respondent that it was "… open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market …" it would follow that the applicant had avoided the provisions of subparagraph (c)(ii) of the subsection and is therefore entitled to her relief.

49. However, in our view a result such as that summarised in the previous paragraph cannot have been the intention of the legislature. The consequence of such a result would be to totally ignore the circumstances of the disposition of the security. As long as an equivalent security could have been purchased "in the ordinary course of trading on a securities market", no further analysis would be necessary. The disposition by which the loss was incurred could be totally ignored, no matter what the circumstances may have been.

50. Further, the consequence of the applicant's proposed remedy is to completely negate any function for paragraph (e) of the subsection. Any apprehension on the part of the applicant as to the financial position of the company would become irrelevant.

51. By contrast, we are satisfied that the extrinsic material quoted above demonstrates that the purposes of the subsection are quite different to those which appear from a literal interpretation of its provisions and as are urged upon us on behalf of the applicant. There are several aspects to those purposes which we discuss below.

52. It is necessary to note that the subsection applies to both traditional securities and marketable securities. The submissions of both Counsel were made on the fundamental basis that the notes must be regarded as marketable securities. Were that not the case, paragraphs (c) and (d) would not apply.

53. In our view, the extrinsic material referred to above demonstrates the primacy of the reason for disposal of a traditional security, whether marketable or not. The provisions of paragraph (e) of the subsection are fundamental to the interpretation of the legislation. That is, if the reason or part of the reason, for the disposition of the security is that which is contemplated by the paragraph, the subsection immediately becomes relevant. We derive that conclusion from the passages which we have emphasised in both the Explanatory Memorandum and the Second Reading Speech by which the subsection was introduced to Parliament quoted above.

54.

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Once the subsection becomes relevant in accordance with that which we have expressed in the previous paragraph, the next question is whether the security is a marketable security. If it is a marketable security as in the present matter, the deduction is only available from income in the relevant year 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.

55. If the security is not marketable (which is not the present matter), upon the application of paragraph (e) of the subsection, the deduction is not available. Once the purpose of the disposal is in accordance with paragraph (e), the deduction is not available because the security cannot be disposed of on the market. The policy fundamental of that approach is to negate the possibility of a disposal which is not at arms length as referred to earlier. We interpret that as being the intent of the reference to "inter group company loans or related partnership loans" in the Explanatory Memorandum quoted above.

56. The extrinsic material emphasises two specific matters. The first of those is the disposal of a marketable security. The second is the reason for that disposal. In our view paragraphs (c) and (d) of the subsection are conjunctive rather than disjunctive for a specific purpose. That purpose is that 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 open 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 being the artificial creation of a loss on the disposal which is other than at arms length. That is the intent of the reference to "inter group company loans or related partnership loans" in the Explanatory Memorandum quoted above.

57. On the basis of the above discussion, we find the following propositions in this application:

  • • the notes disposed of by the applicant which are the subject of this claim are traditional securities in accordance with paragraphs (a) and (b) of the subsection;
  • • the provisions of paragraph (e) of the subsection apply to the disposal of the notes;
  • • by virtue of her notes being marketable securities, the provisions of paragraphs (c) and (d) of the subsection apply;
  • • in order to obtain the deduction of the loss from income, the applicant must have disposed of the traditional securities, which are marketable securities, on the open market; and
  • • by virtue of the fact that the applicant did not dispose of the notes on the open market, the deduction from income is not available.

58. Returning to the submission on behalf of the respondent with, respect to an alternative wording of the subsection referred to above, it is our view that such a re-wording does not express the intention of the Parliament as we have found it to be. The fundamental proposition is that paragraph (e) of the subsection applies to traditional securities which are both marketable and non-marketable and accordingly, the suggested amendment to that paragraph is not appropriate. Further, by virtue of the interpretation of the subsection which we have found to be appropriate, its conjunctive nature is appropriate.

Conclusions

59. Our fundamental conclusion is that the notes disposed of by the applicant, being marketable securities and not having been disposed of on the market, the subsection operates to deny the relief sought. The loss incurred by the applicant in disposal of the notes other than on the market results in a disentitlement to deduct that loss from her taxable income in any of the financial years in which such deduction is sought. Accordingly, we affirm the decision under review.

60. Finally, in our view the structure of the subsection is less than ideal and does not sufficiently express the intention of the Parliament as we have found it to be. We recommend consideration of that proposition.


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