Edited version of private advice

Authorisation Number: 1052032539136

Date of advice: 12 September 2022

Ruling

Subject: Traditional securities

Question 1

Will the gain made on the disposal of the Insurance Entity E Subordinated Notes in the income year ended 30 June 20XD be included in your assessable income under section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the losses made on the redemption or disposal of the listed subordinated notes and treasury bonds be allowable as a deduction from your assessable income in the year of income in which the disposal or redemption takes place under section 70B of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The scheme to which this ruling applies is described in the documents provided to the Commissioner by the applicant) and includes the following:

•         application for a private ruling;

•         A LTD End of Financial Year Report for 20XX, 20XX and 20XX years; and

•         further information provided by email on X XXX 20XD (including attachments).

2.    The taxpayer invested in a number of investment vehicles through an Investment Service. The individual investments were:

a.    Bank A Wholesale Bonds Product name: Bank A Subordinated Notes. Issued: in 20XX. Maturity date: in 20XX ISIN: provided.

b.    Bank B Wholesale Bonds Product name: Bank B Subordinated Notes. Issued: in 20XX. Maturity date: in 20XX. ISIN: provided.

c.    Victorian Treasury Bonds. Product name: Victoria Bond. Issued: in 20XX. Maturity date: in 20XX. ISIN: provided.

d.    Mutual C Wholesale Bonds. Product Name: Mutual C Subordinated Notes. Issued: in 20XX. Maturity date: in 20XX. ISIN: provided.

e.    Bank D Wholesale Bonds. Product Name: Bank D Subordinated Notes. Issued: in 20XX. Maturity date: in 20XX. ISIN: provided.

f.     Insurance Entity E Wholesale Bonds. Product Name: Insurance Entity E Subordinated Notes. Issued: in 20XX. Maturity date: in 20XX. ISIN: provided.

General background to investments

3.    The ruling relates to the investment in the abovenamed Subordinated Notes (SN) and Treasury Corporation Victoria Treasury Bonds (TB) as described in this ruling.

4.    These SNs and TBs were either redeemed or disposed of during the years ended 30 June 20XX to 30 June 20XX. Most realised a loss apart from the Insurance Entity E SN's which realised a small profit.

5.    The SNs and TBs are not segregated exempt assets or segregated current pension assets as defined in the Income Tax Assessment Act 1997.

6.    The nature of the Investments was as follows:

Bank A SNs

The following detail of the instrument is provided in the Instrument pdf:

a)    Par value of each note $XXX Australian dollars.

b)    Optional call date XX March 20XX, Redemption optional call date and redemption available for tax and regulatory reasons at par.

c)    Convertible fully or partially $XXX shares per note. Non-viability trigger by APRA Contractual approach. Notes redeemed not converted in this instance.

d)    Quarterly interest payable after 1^st call date, floating note.

e)    Notes acquired in 20XX at a premium to par value and redeemed by Bank XX March 20XX at par value.

Bank B SNs

The following detail of the instrument is provided as per online 3^rd party information:

a)    The issue is for a floating rate note which is a fully paid, redeemable, subordinated and unsecured debt obligation of Bank B.

b)    The issue has a X year maturity (20XX) but will be callable after X years. APRA has confirmed the Notes will qualify as Tier 2 Capital under Basel III capital adequacy standards. The Notes have an investment grade rating from the rating agencies.

c)    Floating interest rate (3 month BBSW + margin) with interest payable quarterly in arrears.

d)    The SNs include a non-viability loss absorption clause. Upon a non-viability trigger event the Issuer may be required to convert all or some of the SNs to ordinary shares. This has not occurred in this instance.

e)    Holders have no right to request redemption.

f)     SNs acquired in 20XX at premium to par value. Redeemed at par value XX January 20XX.

Victoria Bonds TB

The following detail of the instrument is provided as per the Information Memo online:

a)    The TBs are denominated in Australian Dollars with a fixed coupon interest paid semi-annually in arrears. The TBs are redeemable at par or face value on the Maturity Date.

b)    Purchased in 20XX at premium to par value. Redeemed at par value XX June 20XX.

Mutual C SNs

The following detail of the instrument is provided as per Terms in Media Release.

a)    The SNs will have a notional face value of $XX per instrument, with a minimum subscription amount of $XXX unless the SNs are otherwise issued in a manner which does not require disclosure in accordance with Part 6D.2 or Part 7 of the Corporations Act.

b)    Subject to satisfaction of a solvency condition, interest will be payable quarterly and based on a floating rate (three-month BBSW + a margin).

c)    The SNs will mature in 20XX and, subject to APRA's prior written approval and certain other conditions, the notes are callable from 20XX or if certain tax or regulatory events occur. SN's are redeemable at par value.

d)    If a non-viability trigger event occurs, the SNs may be converted into ordinary shares of Mutual C or written-off.

e)    SNs were purchased 20XX at a premium to par value and disposed of XX November 20XX.

Bank D SNs

The following detail of the instrument is provided as per the term sheet provided.

a)    SNs issued at minimum amount of $XX. Total amount $XXX.

b)    Pays a coupon of X% interest X times a year and may be redeemed at par value.

c)    Bond Maturity 20XX. SNs acquired X April 20XX at premium to par value. Disposed of XX November 20XX.

d)    Coupons can be deferred but the interest will accumulate.

e)    SNs may be converted into shares if certain non-viability triggers are made.

Insurance entity E SNs

The following detail of the instrument is provided as per online 3^rd party information:

a)    Issue SN with floating rate interest payable X times a year.

b)    Convertible.

c)    Acquired SNs X July 20XX at a premium to par value and disposed XX November 20XX.

d)    The Issuers do not currently intend that the SNs will be listed on any stock exchange.

e)    Each SN shall be redeemable on its Maturity Date at its par value amount.

f)     The Issuer or any related Body Corporate may at any time purchase SNs in the open market or otherwise and at any price. All unmatured SNs purchased in accordance with this condition may be held, resold or cancelled at the discretion of the Issuer, subject to compliance with all legal and regulatory requirements.

Relevant legislative provisions

Income Tax Assessment Act 1936

Division 16E

section 26BB

subsection 26BB(1)

paragraph 26BB(1)(a)

paragraph 26BB(1)(b)

subparagraph 26BB(1)(b)(ii)

sub subparagraph 26BB(1)(b)(ii)(B)

paragraph 26BB(1)(d)

subsection 26BB(2)

subsection 26BB(3)

subsection 26BB(4)

subsection 26BB(5)

section 70B

subsection 70B(1)

subsection 70B(2)

subsection 70(2A)

subsection 70B(2B)

subsection 70B(2C)

subsection 70B(3)

subsection 70B(4)

paragraph 70B(4)(c)

subparagraph 70B(4)(c)(i)

subparagraph 70B(4)(c)(ii)

paragraph 70B(4)(d)

paragraph 70B(4)(e)

subsection 70B(7)

subsection 159GP(1)

paragraph 159GP(1)(a)

paragraph 159GP(1)(d)

subsection 159GP(6)

Reasons for decision

Question 1 and 2

Summary

The gain on disposal of the Insurance Entity E SNs is included in assessable income in the year of disposal under section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936).

A deduction is allowable in the year of redemption or disposal, under section 70B of the

ITAA 1936, for a loss arising from the redemption or disposal of each of the following SNs and TBs:

• Bank A SN;
• Bank B SN;
• Victoria Bonds TB;
• Mutual C SN; and
• Bank D SN.

Detailed reasoning

1.    Gains on the disposal or redemption of 'traditional securities' are assessable under subsection 26BB(2) of the ITAA 1936 in the year of the disposal or redemption.

2.    The Commissioners view on traditional securities is found in Taxation Ruling TR 96/14 Income tax: traditional securities (TR 96/14).

3.    Importantly, paragraph 4 of TR 96/14 states the following:

4. We have formed the following views about a number of interpretive issues in relation to the traditional securities provisions of the Act:

(i) paragraph (a) of the definition of 'security' in subsection 159GP(1) of the Act includes securities which are generally recognised as debt instruments. Having regard to paragraphs (a), (b) and (c) of the definition, only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition;

Paragraph 29 of TR 96/14 adds:

29. Having regard to the above discussion, and whilst appreciating the difficulty of finding one genus in paragraph (a), it is our view that the term 'or other security' in the context in which it is used only encompasses instruments that evidence an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. We have drawn this conclusion because each of the listed instruments in paragraph (a) evidence such an obligation. These types of securities will generally be recognised as debt instruments.

4.    Therefore, before we look at the legislative requirements, it assists to determine if the investments in question are debt instruments, as defined.

5.    The SNs acquired by the taxpayer are all issued by the issuer as a capital raising loan to the investor, repayable at face value at maturity, sometime in the future. There is an obligation on the part of the issuer to pay an amount to the holder during the term of the investment or on redemption. These investments qualify as debt instruments. Similarly, the TBs are also issued with an obligation on the issuer to pay an amount to the holder during its term and on maturity.

6.    In determining whether the SNs and TBs constitute 'traditional securities', it is necessary to first consider whether the investments are a 'security' for the purposes of section 26BB of the ITAA 1936.

Security

7.    Subsection 26BB(1) of the ITAA 1936 defines a 'security' to have the same meaning as in Division 16E. Subsection 159GP(1) within Division 16E defines a 'security' to mean:

(a)  stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;

(b)  a deposit at bank or other financial institution;

(c)   a secured or unsecured loan; or

(d)  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.

8.    The taxpayer acquired the SNs and the TBs which each require the issuer to repay the issue value of the SN or TB on redemption at maturity. Accordingly, it is considered that the SNs and TBs constitute securities by reason of paragraph 159GP(1)(a) of the ITAA 1936. Regardless, the SNs and TBs would qualify as a security under paragraph 159GP(1)(d) as the issuer is liable to pay an amount or amounts to the holder.

Traditional security

9.    The term 'traditional security' is defined under subsection 26BB(1) of the ITAA 1936 to mean a security held by a taxpayer that:

(a)  is or was acquired by the taxpayer after 10 May 1989;

(b)  either:

(i)            does not have an eligible return; or

(ii)           has an eligible return, where:

(A)  the precise amount of the eligible return is able to be ascertained at the time of issue of the security; and

(B)  that amount is not greater than 1.5% of the amount calculated in accordance with the formula: Payments × Term

where:

Payments is the amount of the payment or of the sum of the payments (excluding any periodic interest) liable to be made under the security when held by any person; and

Term is the number (including any fraction) of years in the term of the security;

(c)   (Repealed by No 47 of 2016); and

(d)  is not trading stock of the taxpayer.

10.  In order to constitute 'traditional securities', the 'securities' must satisfy the remaining criteria listed in the definition of 'traditional security' in subsection 26BB(1) of the ITAA 1936. Paragraph 26BB(1)(a) is satisfied as all the securities were acquired after 10 May 1989.

11.  The criteria described in paragraph 26BB(1)(b) of the ITAA 1936 is reliant on whether the security has an eligible return or not. An 'eligible return' is defined in subsection 159GP(3). A security will be taken to have an 'eligible return' subject to this definition when it is reasonably likely at the time of its issue, having regard to the terms of the security, for the sum of all payments to be made under it (other than periodic interest payments) to exceed the security's issue price.

12.  'Periodic interest' has the same meaning as in Division 16E (in subsection 159GP(6) of the ITAA 1936). Basically, it is any interest that is paid not more than one year after it commences to accrue. The interest may be payable by virtue of a coupon rate attached to the security, or the amounts and the timing of payment may be specified in the terms of the security. The coupons for each of the SNs or TBs the taxpayer holds are paid quarterly, half yearly or annually and thus meet the definition of periodic interest in subsection 159GP(6). Payment of interest at least annually is confirmed by the Annual Statements provided.

13.  Subparagraph 26BB(1)(b)(ii) of the ITAA 1936 requires the precise amount of the eligible return to be capable of calculation when the security is issued and for that amount to be not greater than 1.5% of the payments liable to be made under the terms of the security (excluding periodic interest) X the years in the term of the security.

14.  As issue values of the SNs and TBs are the same as their redemption values, the precise amount of the eligible return when the security was issued is zero and is incapable of exceeding 1.5% of the payment to be made by the issuer on maturity, whatever the term of the security may be. The value of these types of investments lie in the return from periodic interest.

15.  Even though the Insurance Entity E SNs were disposed of for a profit on the secondary market of greater than 1.5% of their issue value, the profit made is by a payment from an entity other than the bond issuer and, therefore, cannot be considered a payment as defined for the purposes of sub-subparagraph 26BB(1)(b)(ii)(B) of the ITAA 1936. Therefore, the taxpayer in this instance does not have an eligible return of greater than 1.5%.

16.  The other disposals all incurred a loss so the eligible return would be zero as discussed earlier. Furthermore, the precise amount of the eligible return must be capable of calculation when the security is issued. The terms of the taxpayer's SNs and TBs are such that the issue value is the same as the redemption value. When the SNs and TBs issued, the precise amount of any return was zero. As there is no excess amount, there is no eligible return. Subparagraph 26BB(1)(b)(i) of the ITAA 1936 will apply. Therefore, the SNs and TBs will not be regarded as 'qualifying securities' (i.e., those securities with an eligible return) by virtue of subsection 159GP(1).

17.  It is evident that the taxpayer acquired their SNs and TBs as an investment because the net yield based on the purchase price, the redemption price at maturity and coupon payments (less any fees) would constitute an acceptable revenue stream. The investments were not acquired or disposed of as trading stock. Paragraph 26BB(1)(d) of the ITAA 1936, therefore, does not apply.

18.  As each of the requirements of the definition of 'traditional security' in subsection 26BB(1) of the ITAA 1936 are satisfied, the SNs and TBs are securities that satisfy the definition of a 'traditional security'.

19.  Section 70B of the ITAA 1936 was introduced as the counterpart of section 26BB of the ITAA 1936. Subsection 70B(1) of the ITAA 1936 provides for expressions used in section 26BB to also be used in section 70B. Section 26BB provides for the gains on disposal or redemption of traditional securities to be assessable income and section 70B provides for losses on the disposal or redemption for traditional securities to be deductions.

Application of section 26BB of the ITAA 1936 to profit on disposal of Insurance Entity E SNs

20.  As per above discussion, the Insurance Entity E SNs are considered to be 'traditional securities' under subsection 26BB(1) of the ITAA 1936.

21.  We, therefore, need to look at the remaining provisions within section 26BB of the ITAA 1936 to determine if, in the circumstances of the taxpayer, subsection 26BB(2) does not apply.

22.  Neither subsection 26BB(3) or 26BB(4) of the ITAA 1936, which relate to non-arm's length dealings in the securities, apply to the Insurance Entity E SNs. Similarly, as the Insurance Entity E SNs were not exchanged, redeemed or disposed of for shares, subsection 26BB(5) also has no application.

Conclusion on application of section 26BB of the ITAA 1936 to profit on disposal of Insurance Entity E SNs

23.  As per above discussion, the Insurance Entity E SNs are considered to be traditional securities and the gain on disposal will be assessable under section 26BB of the ITAA 1936.

70B of the ITAA 1936 application

24.  As discussed above, subsection 70B(1) of the ITAA 1936 states that expressions used in section 70B that are also used in section 26BB have the same meanings in section 70B as in section 26BB.

25.  Subsection 70B(2) of the ITAA 1936 states:

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.

26.  As per the discussion above, we have determined that the taxpayer's SNs and TBs, redeemed or disposed of, qualify as 'traditional securities'.

27.  We need to now look at the negative provisions within section 70B of the ITAA 1936 in which a deduction under 70B is not allowable in respect to SNs and TBs disposed of or redeemed for a loss.

28.  Subsection 70B(2A) of the ITAA 1936 states that:

A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of traditional securities that are:

(a) segregated exempt assets (for the purposes of the Income Tax Assessment Act 1997) of a life assurance company; or

(b) segregated current pension assets (as defined in the Income Tax Assessment Act 1997) of a complying superannuation fund.

29.  In this case, the investments are not segregated exempt assets or segregated current pension assets. Additionally, the term sheets for the Insurance Entity E investments do not indicate the investments are segregated exempt assets of a life insurance company. Therefore, subsection 70B(2A) of the ITAA 1936 does not apply.

30.  Subsections 70B(2B), 70B(2C) and 70B(3) of the ITAA 1936 also disallow a deduction under 70(B)(2) in certain circumstances. However, these subsections are not relevant to the current case and relate to where the traditional securities are exchanged for ordinary shares or the parties were not dealing at arm's length.

31.  Subsection 70B(4) of the ITAA 1936 states:

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 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.

32.  Section 70B of the ITAA 1936 was enacted in 1989. By way of background to the 1992 amendments to section 70B (which included subsection 70B(4)), the Treasurer confirmed (Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 1992 (1992EM) at page 56)that:

It was not intended that gains and losses of a genuinely capital kind would be affected by the traditional securities rules contained in sections 26BB and 70B of the ITAA 1936. What was intended to be brought onto revenue account were gains and losses in value attributable to movements in interest rates or other market adjustments.

33.  Given that the intention was for section 70B of the ITAA 1936 not to include gains and losses of a genuinely capital kind, in explaining the need for the enactment of subsection 70B(4) of the ITAA 1936, the Treasurer said (also at page 56 of that 1992 EM)):

However, claims for deduction 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 the 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.

34.  Subsection 70B(4) of the ITAA 1936, therefore, acts to prevent deductions from being allowable under section 70B for a loss of a capital nature on the disposal or redemption of a traditional security, where it would objectively be concluded that a reason for the disposal or redemption was an apprehension or belief that the issuer would be unable or unwilling to discharge its obligations to make payments under the security. There will be no loss of the deduction, however, in cases where the traditional security is a marketable security and the losses arise from a disposal that takes place in the ordinary course of trading on a securities market (page 57 of the 1992 EM).

35.  The guidance provided in the 1992 EM on the application of section 70B of the ITAA 1936 was applied in WRBD v Commissioner of Taxation AATA 368; 2009 ATC 1-007; 75 ATR 712 (WRBD Case). That case involved the issue of deductibility of losses arising from the disposal of convertible notes after a company was placed in receivership.

36.  In referring to the 1992 EM, Justice Mushin and Senior Member Pascoe state in the WRBD Case judgement that:

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. 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.

37.  The ATO's response to the above case was outlined in a Decision Impact Statement DIS 2008/3272-3278 (WRBD DIS) issued on 10 September 2009. The statement includes the following on the ATO view of the decision:

The Tax Office considers the effect of the decision is that:

•         if a traditional security is not a marketable security and paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) as subsection 70B(4) applies. The Tribunal held that 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.

•         if a traditional security is a marketable security and paragraph 70B(4)(e) applies to the disposal or redemption of the traditional security, a deduction is not available under subsection 70B(2) unless both the acquisition and sale of the marketable security took place on the open market, or in the case of the acquisition of the security, an identical security could be acquired in the ordinary course of trading on a securities market.

•         Subsections 70B(4)(c) and (d) should be read conjunctively rather than disjunctively.

•         The failure to dispose of a marketable security other than on the market means that a deduction is not available under subsection 70B(2) as subsection 70B(4) applies.

38.  Applying the guidance provided in the WRBD DIS to this case it is, therefore, necessary to determine if the SNs and TBs are:

•         traditional securities;

•         marketable securities;

•         securities that were both acquired and sold on the open market, or in the case of the acquisition of the SNs and TBs, an identical security could have been acquired in the ordinary course of trading on a securities market; and

•         securities to which paragraph 70B(4)(e) of the ITAA 1936 applies.

Traditional securities and marketable securities

39.  In the present case, as stated above, the Commissioner agrees that the SNs and TBs, the subject of this private ruling, are traditional securities within the meaning of section 26BB of the ITAA 1936.

40.  A marketable security is a traditional security that is covered by paragraph (a) of the definition of 'security' in subsection 159GP(1) of the ITAA 1936. That paragraph is extremely wide in its terms, and refers to 'stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security'. The Commissioner agrees that the SNs and TBs are marketable securities.

Paragraphs 70B(4)(c) and (d) - Acquisition and sale took place on the open market, or in the case of the acquisition, an identical security could have been acquired in the ordinary course of trading on a securities market.

41.  Considering the guidance provided in the WRBD DIS, a deduction will not be denied by subsection 70B(4) of the ITAA 1936 if the marketable security is acquired and disposed of by a taxpayer in the ordinary course of trading on a securities market. A deduction will also not be denied if, in the case of the acquisition of the security, it was open to the taxpayer to acquire an identical security in the ordinary course of trading on a securities market.

42.  Turning to whether or not the taxpayer acquired the security in the ordinary course of trading on a securities market, this is a matter of fact based on subjective purposes and the objective evidence provided. It is considered that the legislation is from the perspective of the holder, in that, it is the holder that must not have acquired the security in the (holder's) ordinary course of trading on a securities market.

43.  In the PBR application, it is not put forward that the taxpayer acquired the securities in the (ordinary) course of trading. Also, the investments were held by the taxpayer for an extended period and there was no indication that the taxpayer intended to trade on the securities with a hope to make a profit on their resale due to favourable market movements. On the contrary, the indicators are that the taxpayer purchased the SNs and TBs on investment account seeking to obtain the interest income and not, necessarily, making a profit from either market price movements or from a trading business on the securities (or any other securities for that matter).

44.  Accordingly, as it is considered that the taxpayer acquired the SNs and TBs on investment account, the condition at subparagraph 70B(4)(c)(i) of the ITAA 1936 is satisfied. With regard to subparagraph 70B(4)(c)(ii), it is considered that for the same reasons it was not open to the taxpayer to acquire identical notes in the ordinary course of trading on a securities market. Therefore, subparagraph 70B(4)(c)(ii) is also satisfied.

45.  The disposal of the SNs and TBs did not take place in the ordinary course of trading on a securities market. Based on this, it is accepted that paragraph 70B(4)(d) of the ITAA 1936 is also satisfied.

Application of paragraph 70(B)(4)(e) of the ITAA 1936

46.  The condition in paragraph 70B(4)(e) of the ITAA 1936 is that:

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 discharge all liability to pay amounts under the security.

47.  Paragraph 70B(4)(e) of the ITAA 1936 requires regard to be had to the financial position of the 'issuer' of the security for determining whether a deduction is allowable under section 70B for a loss on the disposal of a traditional security.

48.  The term 'issuer' is defined in subsection 70B(7) of the ITAA 1936 as:

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.

In the definitions section of the 1992 EM, 'issuer' is described as meaning 'the person who at any time has a liability to pay amounts under a security'.

49.  In this particular case, the issuers of the securities are the relevant issuers of the SNs and TBs. Under the terms of the securities, the taxpayer's entitlement to receive interest and principal payments are outlined and the issuer has a liability to pay an amount on maturity.

50.  As a result, in considering whether the issuer is unable or unwilling to discharge all liability to pay amounts under the security, it is accepted that this can only mean amounts actually payable by the issuer under the terms of the SNs and TBs. Based upon the facts, it appears all liabilities of the issuer under the terms of the securities have been met by the issuer.

51.  In considering whether the issuer would be unable or unwilling to discharge a liability to pay an amount under the security, paragraph 70B(4)(e) of the ITAA 1936 requires that regard is had to the financial position of the issuer of the security, perceptions of the financial position of the issuer of the security and other relevant matters.

52.  In relation to each of the SNs and TBs, there were no specific concerns at the time of redemption or disposal in relation to the issuer's ability to meet its liabilities. It is accepted that in these circumstances, it could not be said that there is 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.

53.  Further, it is considered that this conclusion is consistent with the 1992 EM. Specifically, if the loss in value is attributable to general market conditions or credit defaults of companies in the reference portfolio, these both relate to a 'market adjustment' having regard to the terms of the securities.

54.  Based on the above, it is considered that the condition in paragraph 70B(4)(e) of the ITAA 1936 is not satisfied.

Summary - Subsection 70B(4) of the ITAA 1936

55.  For the reasons outlined above, the losses incurred on disposal of the SNs and TBs are properly characterised as revenue losses as all of the requirements in subsection 70B(4) of the ITAA 1936 are not satisfied.

Conclusion 70B of the ITAA 1936 deduction

56.  As the requirements of subsection 70B(2) of the ITAA 1936 are satisfied, and a deduction is not disallowed by another subsection in section 70B, a deduction is allowable under section 70B for the losses incurred on the redemption or disposal of each of the SNs and TBs.