Edited version of private ruling

Authorisation Number: 1011535165128

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Ruling

Subject : Securities lending arrangement and trading stock

Issue 1

Question 1

Does section 26BC(13) of the Income Tax Assessment Act 1936 (ITAA 1936) provide the Commissioner with a discretion (which may be exercised) by determining not to amend the taxpayers income tax return?

Advice/Answers

No.

Issue 2

Question 1

To the extent the taxpayer trades its' shares as trading stock, can the shares be taken to be on hand as years end for the purposes of section 70-35 of the Income Tax Assessment Act 1997 (ITAA 1997), notwithstanding that legal title to those trading shares was transferred under the Securities Lending Agreement?

Advice/Answers

No.

Question 2

To the extent that the shares were held as trading stock, should the proceeds be regarded as not being derived under section 6-5 of the ITAA 1997?

Advice/Answers

No.

The scheme

The Taxpayer held shares in a company.

The trustee of a Trust conducted share trading on behalf of the Trust. The shares held by the Trust were used as security for a margin loan in the name of the Trustee. Trust held a portfolio of shares and was also indebted on account of the margin loan.

The Taxpayer entered into a securities lending agreement (SLA) whereby the shares held by Taxpayer were transferred from their existing margin lender.

The SLA provides for the transfer of title in the shares to X Co and for X Co to redeliver equivalent securities under the terms of the SLA.

The Taxpayer believed it had entered into a margin lending arrangement, and that it retained legal and beneficial title to the relevant shares. The Taxpayer believed that no adverse tax consequences would occur from entering into the arrangement. The Taxpayer lodged their income tax returns for the year end on the basis that no disposal of the relevant shares had occurred. Assessments issued in conformity with the lodged returns.

The Taxpayer requested the return of shares transferred under the SLA. The shares were not returned.

X Co appointed voluntary administrators.

The Taxpayer made subsequent requests for the delivery of the shares transferred under the SLA.

During this time, the solicitors acting on behalf of X Co wrote to the solicitors for the Taxpayer asserting that the Taxpayer merely had a monetary claim for the net value of the shares, after offsetting the loan.

The Taxpayer did not have legal or beneficial title to the shares once those shares had been transferred under the SLA.

Upon appointment of the administrators the Taxpayer became unsecured creditors of X Co for the value of the unreturned shares transferred under the SLA.

The Taxpayer filed proof of debt forms with the administrators for the market value of the unreturned shares, together with any dividends payable.

Subsequent events

Subsequently a liquidator was appointed to X Co.

The administrators proposed a Scheme of Arrangement (the Scheme) through which a settlement would be implemented if accepted by the requisite number and percentage of creditors. An Explanatory Statement accompanying the Scheme was issued.

The Scheme was approved.

The shares held by the Taxpayer were not required to be called upon as the market value of the trustees trading shares were sufficient to offset, in full, the credit balance of the loan.

At the time of entering into the SLA, the Taxpayer were of the understanding that it retained legal and beneficial title to the shares and the trading shares.

The Taxpayer income tax return for the year of income was lodged on the basis no disposal of the shares had occurred.

Reasons for decision

Issue 1

Question 1

Subsection 26BC(13)of the ITAA 1936 Amendment of assessment

Subsection 26BC(4) of the ITAA 1936 provides that, where the conditions contained in subsection 26BC(3) of the ITAA 1936 have been met, where there has been a disposal of a security under a securities lending arrangement or a security has been reacquired under a securities lending arrangement, the lender's position in respect of those arrangements will be determined as if:

· the lender had not disposed of the borrowed security or acquired a replacement security: paragraph 26BC(4)(c) of the ITAA 1936

· the borrowed security was held by the lender at all times during the borrowing period: 26BC(4)(d) of the ITAA 1936 , and

· the replacement security given by the borrower to the lender was the original security, whether or not that security is the identical security: 26BC(4)(e) of the ITAA 1936.

The result is that where the requirements of subsection 26BC(3) of the ITAA 1936 have been met by both the borrower and the lender, the lender will not be subject to any tax consequences in respect to the disposal and reacquisition of the relevant securities.

However, where the conditions contained in subsection 26BC(3) of the ITAA 1936 have not been met, subsection 26BC(13) of the ITAA 1936 states:

Where:

(a) in the making of an assessment this section has been applied on the basis that a circumstance that did not exist at the time of making the assessment would exist at a later time: and

(b) after the making of the assessment the Commissioner becomes satisfied that the circumstance will not exist;

then, in spite of anything in section 170, the Commissioner may amend the assessment at any time for the purpose of ensuring that this section is to be taken always to have applied on the basis that the circumstance did not exist.

Although the provision uses the word 'may' which prima facie would indicate that this evidences a discretionary provision, in some provisions the word 'may' has been used to refer to an obligatory requirement.

The word 'may' must be read in the context of what the legislation intended the word to mean to achieve the result the statute intended. In Finance Facilities Pty Ltd v. FCT (1971) 127 CLR 106, the High Court examined subsection 46(3) of the ITAA 1936, which provided that the Commissioner 'may allow' a private company a further rebate if dividends were paid in a particular way. The High Court ruled that once the conditions were met, the Commissioner was obliged to allow the rebate. Windeyer J said at 134-5:

This does not depend on the abstract meaning of the word "may" but of whether the particular context of words and circumstance make it not only an empowering word but indicate circumstances in which the power is to be exercised - so that in those events the "may" becomes a "must". Illustrative cases go back to 1693: R. v Barlow, Carth. 293. Today it is enough to cite Julius v Lord Bishop of Oxford (1879), 5 App Cas 214; [1874-80] All E.R Rep. 43; and add in this Court Ward v Williams (1955), 92 CLR 496, at pp 505-506. But I select one other reference out of a multitude: Macdougall v Paterson (1851), 11 CB 755. There Jervis, CJ, said in the course of the argument (at p 766): "The word 'may' is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise." And, giving judgment, he said (at p 773): "We are of the opinion that the word 'may' is not used to give a discretion, but to confer a power upon the court and judges; and that the exercise of such power depends, not upon the discretion of the court or judge, but upon the proof of the particular case out of which such power arises."

Support for this approach can also be found in Ex Parte The Carpathia Tin Mining Company Ltd (1924) 35 CLR 552. The High Court was considering subsection 33(1) of the Income Tax Assessment Act 1915-1918 (Cth), which provided that the Commissioner may make such alterations in or additions to any assessment as he thought necessary in order to ensure its completeness and accuracy. In the course of his written judgment, Rich J stated (at 554):

The Commissioner "may" at any time make alterations or additions to an assessment, but the subsection limits them to "such alterations in or additions to any assessment as he thinks necessary in order to insure its completeness and accuracy." No one else's opinion on this subject can be substituted for that of the Commissioner, but, if he forms that opinion, he "may", and therefore, as I think, is bound to, make the proper alteration or addition.

The terminology used in subsection 26BC(13) of the ITAA 1936 is similar to that used in section 170 of the ITAA 1936. Section 170 of the ITAA 1936 also provides that the Commissioner 'may' amend an assessment in various situations. In relation to the former section 170 of the ITAA 1936, the Federal Court in Brownsville Nominees Pty Ltd v. FCT 88 ATC 4513 held that 'It must be noted that subsection170(1) of the ITAA 1936 does not impose a duty on the Commissioner to make an amended assessment. The subsection is enabling in form. The purpose of section 170 is to confer a power on the Commissioner.'

In the context of section 170 of the ITAA 1936 we consider that the Commissioner cannot be compelled to amend an assessment if he does not think it is necessary. However, we also take the view that the Commissioner has an obligation to amend an assessment where he has received sufficient information to form the view that the assessment is incorrect and make the relevant adjustments subject to the good management rule.

In this case the taxpayer had entered into a securities lending arrangement. Under the SLA all right, title and interest in the relevant shares had pass absolutely from the Taxpayer to X Co. The taxpayer did not retained legal and beneficial title to the relevant shares. The Taxpayer lodged its income tax return for the year end on the basis that no disposal of the relevant shares had occurred and assessments issued in conformity with the lodged returns. The assessment was not correct and the relevant adjustments should be made to correct the assessment.

Issue 2

Question 1

Trading stock

Securities Lending Arrangement

Section 26BC of the ITAA 1936 enables both borrowers and lenders involved in securities lending arrangements to treat the transactions under the securities lending arrangement as if they had not occurred. Section 26BC deals with arrangements where a taxpayer enters into an agreement to dispose of securities to another taxpayer on condition that at some later time the borrower returns the same or identical securities.

Subsection 26BC(3) of the ITAA 1936 describes the type of securities lending arrangement which qualify for securities lending relief. Section 26BC applies to transactions under a securities lending arrangement where a lender disposes of an eligible security to a borrower. Subparagraph 26BC(3)(a)(ii) deals with the return of the borrowed securities. Where borrowed securities are re-acquired less than 12 months after the original disposal time by the lender from the borrower then section 26BC applies. This subparagraph defines the terms: 're-acquisition time' as the time the borrower returned the security to the lender; and 'replacement security' as the security returned, which will be either the borrowed security or an identical security.

Under paragraphs 26BC(4) (c) and (d) of the ITAA 1936 the lender's position is determined as if:

· the lender had neither disposed of the borrowed security nor acquired the replacement security paragraph (4)(c);

· the lender had held the borrowed security at all times during the borrowing period paragraph (4)(d); and

· the replacement security will be treated as the borrowed security whether it is or not paragraph (4)(e).

The result of the application of section 26BC of the ITAA 1936 is that where the lender and borrower have met all the requirements of the section the lender will not be subject to any tax consequences as a result of the disposal and re-acquisition of the relevant securities.

Under a securities lending arrangement, legal title to shares passes from the lender of the securities, the subject of the securities lending arrangement, to the borrower of the securities (though it is the lender and not the borrower of the shares who is regarded as being entitled to any dividends which might be payable).

As noted in the reasons for decision at question 1, the taxpayer had entered into a securities lending arrangement. The SLA was not a securities lending arrangement to which section 26BC of the 1936 Act applied as the conditions contained in subsection 26BC(3) of the ITAA 1936 have not been met.

Trading Stock on hand

Section 70-35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer who carries on a business must include the value of their trading stock on hand in working out their assessable income and deductions.

Under section 70-35 of the ITAA 1997, The Taxpayer is required to include the differences between the value of all trading stock-on-hand at the beginning of the income year and at the end of the income year to ascertain its taxable income.

Trading stock is defined in paragraph 70-10(a) of the ITAA 1997 to include: anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

The Commissioner of Taxation has taken the position that the dispositive power test is the appropriate test for determining whether stock is on hand. Dispositive power is generally taken to be lost when title and risk associated with the trading stock pass to the buyer. Taxation Ruling IT 2670 Income Tax: Meaning of Trading Stock on hand provides guidance on the matters to consider in determining what constitutes trading stock on hand. It affirms the view espoused in the decision of the High Court of Australia in Farnsworth v. V.C. or T. (1949) 78 CLR 504 (Farnsworth) that the dispositive power test prevails over all other tests when determining whether trading stock is on hand.

Farnsworth involved a fruit grower who was deemed to lose dispositive power when the fruit was delivered to a packaging house where it was mixed with other fruit from different suppliers. Dispositive power was lost because once the fruit had been delivered to the packaging house, the fruit grower no longer had the ability to dispose of the trading stock.

In All States Frozen Foods v. F.C. of T. (1990) 21 FCR 457 (90 ATC 4175; (1990) 20 ATR 1874, the taxpayer, a wholesale dealer in frozen foods, purchased frozen foods from overseas suppliers. At 30 June 1985 shipping containers of frozen food were en route by sea to Australia. The goods were purchased under a number of contracts, pursuant to which prices had been paid, and bills of lading had been delivered to the taxpayer prior to 30 June 1985. This meant that the goods had already been vested to the taxpayer.

In assessing the taxpayer, the Commissioner assessed the goods in transit as being stock on hand at year end, on the basis that the goods had been paid for and the bill of lading had been delivered to the taxpayer prior to that date.

The taxpayer objected, stating that as the goods were in transit, they were no longer on hand. The Court agreed with the Commissioner on the basis that while the goods had not been physically received, dispositive power had been transferred to the taxpayer at the time the bill of lading had been received.

Paragraph 3 of Taxation Ruling IT 2670 provides that goods are trading stock on hand for the purposes of section 70-35 of the ITAA 1997 notwithstanding that they have not been physically delivered to the Taxpayer business premises or outlet provided the taxpayer is in a position to dispose of the goods. Accordingly, dispository power is the appropriate test for determining which taxpayer will account for trading stock on hand.

Paragraph 13 of IT 2670 further provides that where a taxpayer does not own the stock, the Commissioner will treat the taxpayer as having sufficient dispositive power for the stock to be trading stock on hand where the circumstances explained by the High Court in F.C. of T. v Suttons Motors (Chullora) Wholesale Pty Ltd (1984-85) 157 CLR 277 at p. 283 are, in substance, the same. Paragraph 12 of IT 2670 refers to this passage:

The relevant vehicles were, at the commencement of the tax year, plainly in the possession and at the risk of the Suttons Group. They were held by the Group for the purpose, and only for the purpose, of being offered for sale in the ordinary course of the composite business which that Group, looked at as a whole, carried on. They represented the stock which the Group held to offer for sale and to sell in the course of that overall business and which it had become entitled to, and commercially though not legally obliged to, purchase from G.M.H.s wholesale price at the time it took delivery. If the Groups overall business from the original acquisition of possession of vehicles under the floor plan arrangement to the ultimate retail sale of them to the public be viewed as a composite whole, it appears to us that the relevant motor vehicles were, at the commencement of the tax year, the trading stock on hand in relation to that business within the traditional and central meaning of the term trading stock.

The facts in this case are similar to the circumstances outlined in IT 2670. Under the Securities Lending Arrangement entered into between the Lender in respect to the relevant securities and the Borrower, the Taxpayer agreed to make those securities available to the Borrower for a certain period so that the Borrower could deal with the securities on its own behalf. Pursuant to the SLA, the Taxpayer was obliged to deliver the relevant securities to the Borrower. Although the Borrower was required to redeliver equivalent securities to the Taxpayer under the SLA, the Borrower, had the right to possession of the securities for the purpose of use in the ordinary course of the Borrower's business. As such, the relevant securities at all times were at the risk and in the possession of the Borrower.

The provisions of the SLA expressly provide for the transfer of both legal and beneficial ownership of the securities which are transferred from the 'Lender' to the 'Borrower', as defined by the SLA. The absolute passing of legal and equitable interest in the securities the subject of the SLA is reinforced by the clauses of the SLA.

In addition, the Lender is required to provide the warranty that it is absolutely entitled to pass full legal and beneficial ownership of all Securities provide pursuant to the SLA, which survives the expiry the SLA.

Under the SLA the parties were required to execute and deliver all necessary documents and give all necessary instructions to procure that all right, title and interest in the relevant securities. Title to the securities passed absolutely from the Taxpayer to the Borrower, free from all liens, charges, equities and encumbrances, on delivery to the Borrower under the SLA.

Paragraphs 6 and 17 of IT 2670 provide that the test of dispository power will be satisfied even where the entity does not have immediate physical possession of the trading stock. The SLA provides for this as the Securities would be deemed to be delivered on delivery of the relevant instruments of transfer and certificates or other documents of title. In this instance, the Borrowers power to dispose of the relevant securities in the ordinary course of its business was not restricted by the terms of the SLA.

Under the SLA all right, title and interest in the relevant securities had pass absolutely from the the Taxpayer to the Borrower. The Taxpayer did not retained legal and beneficial title to the relevant securities. The Borrower provided security to the Taxpayer in order to secure the borrowing. The security provided by the Borrower to the Taxpayer was used by the Taxpayer to acquire and trade in other securities. At the end of that period, Equivalent Securities of the same number and type as the original securities were to be returned to the Taxpayer. The Borrower was to pay a fee for the use of the securities for the relevant period. Equivalent Securities of the same number and type as the original securities were not redelivered to the Taxpayer.

At the time risk and title passed to the Borrower the Taxpayer no longer had legal title over, or was responsible for the trading stock. It is our contention that the Taxpayer lost dispositive power at this time as it no longer had the ability to dispose of the trading stock to another entity (that is, the Taxpayer had definitely committed to disposing of the trading stock to the Borrower, who has assumed risk and title over the trading stock).

Under the terms of the SLA, the power of disposition over the trading stock was transferred from the Taxpayer to the Borrower, and as a result, the securities were not trading stock on hand of the Taxpayer for the purposes of subsection 70-35(1) of the ITAA 1997.

In accordance with section 70-35 of the ITAA 1997, the opening and closing values of trading stock are compared, and if the closing stock is less then the opening stock, the difference can be claimed as a deduction. If, however, the value of the trading stock is greater then the value of the opening stock, the difference is included in the taxpayer's assessable income.

Conclusion

The lending of the shares is regarded as a disposal, the consideration being the borrower's commitment to redeliver Equivalent Securities. The shares transferred under the SLA were not on hand as at years end as legal title to those shares was transferred to the Borrower, being the point in time when the Taxpayer no longer had dispositive power. Therefore, to the extent the Taxpayer trades its' shares as trading stock, the shares are taken not to be on hand as at tears end for the purposes of section 70-35 of the ITAA 1997 as legal title to those trading shares was disposed of to the Borrower under the SLA.

Under section 70-35 of the ITAA 1997, the Taxpayer is required to include the differences between the value of all trading stock-on-hand at the beginning of the income year and at the end of the income year to ascertain its taxable income.

Issue 2

Question 2

Section 6-5 of the ITAA 1997 - derivation of income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount is assessable income is income according to ordinary concepts.  Business income is assessable income according to ordinary concepts for the purposes of subsection 6-5(1).

Whether or not a particular receipt is income according to ordinary concepts depends upon its character in the hands of the recipient (Scott v. FC of T (1966) 117 CLR 514 at 526; (1966) 14 ATD 286 at 293). Regard must be had to the whole of the circumstances in which the payment is received.

The taxpayer has indicated that it is in the business of trading shares. The taxpayer states that the shares transferred under the SLA were trading stock held on revenue account.

The legal requirement for the derivation of income is as follows:

Section 6-5(2) of the ITAA 1997 brings to assessable income ordinary income derived directly or indirectly from all sources. The term derived is defined to have 'a meaning affected by subsection 6-5(4) of the ITAA 1997.  That section reads;

In working out whether you have derived an amount of ordinary income, and (if so) when you have derived it, you are taken to have received the amount as soon as it is applied with or dealt with in any way on your behalf or as you direct.

Section 6-10 (3) of the ITAA 1997 states

If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

There are two methods of accounting for determining when income is received. These are the receipts versus earnings method and are covered by Taxation Ruling TR98/1 Income tax: determination of income; receipts versus earnings (TR 2008/1). The receipts method is referred to as the cash received basis and under this method income is derived when it is received either actually or constructively, under subsection 6-5(4) of the ITAA 1997. The earnings method or accruals method has the point of derivation of income occurring when a recoverable debt is created. Although TR 98/1 is not intended to be prescriptive it outlines at paragraph 20 that the earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business. For the purposes of TR 98/1, trading income (or income from trading) is income from the sale of trading stock (as defined in subsection 995-1(1) of the ITAA 1997).

Taxation Ruling TR 97/15 Income tax: conditional contracts: derivation of income; allowable deductions; trading stock on hand states:

23. It is an accepted principle of income tax law that the method under which a taxpayer accounts for its business or income producing activities for purposes of income tax must 'give a substantially correct reflex of the taxpayer's true income' (see Dixon J in The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Ltd (1938) 63 CLR 108 at 154; (1938) 5 ATD 98 at 131 ( Carden's case)).

24. Dixon J was demonstrating this principle in Carden's case when he made the point that the basis on which a trading concern ought to be taxed is on its earnings rather than on its receipts. He said (CLR at 156; ATD at 132):

'The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases. In such an account book debts represent what before sale was trading stock and it is almost inevitable that they should be taken into consideration upon an accrual and not a cash basis.'

25. This line of reasoning was used in J Rowe & Son Pty Ltd v. FC of T (1971) 124 CLR 421; 71 ATC 4157; (1971) 2 ATR 497 ( Rowe's case) to conclude that the accruals basis is the appropriate method for determining the amount of income derived by a taxpayer carrying on a business of selling goods.

Case law dealing with the derivation of income provides that a gain has 'come home' to the taxpayer if a debt is presently recoverable by action or the taxpayer is not obligated to take any further steps to be entitled to payment (be it actual or constructive payment) ( FC of T v. Australian Gas Light Co & Anor (1983) 83 ATC 4800; (1983) 15 ATR 105; Henderson v. Federal Commissioner of Taxation. (1970) 119 CLR 612; 70 ATC 4016; (1970) 1 ATR 596; Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation. (1965) 114 CLR 314; 14 ATD 98; (1965) 9 AITR 673; Rowe J. & Son Pty. Ltd. v. Federal Commissioner of Taxation. (1971) 124 CLR 421; 71 ATC 4157; (1971) 2 ATR 497). In addition, where a debt is presently recoverable by action, generally, there will be a present right to receive an amount in question, that amount will be quantifiable and not subject to any contingency or defeasibility ( Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1994) 28 ATR 130; Barratt & Ors v. Federal Commissioner of Taxation (1992) 36 FCR 222; 92 ATC 4275; (1992) 23 ATR 339; Farnsworth v. Federal Commissioner of Taxation (1949) 78 CLR 504; 9 ATD 33; (1949) 4 AITR 258.

Based on the findings in Gasparins case an amount is not receivable if it is subject to any contingency. This point was considered in AAT Case 8284 (1992) 24 ATR 1085; Case Z37 93 ATC 342 where a joint-venturer contracted to buy property from the joint-venturers on the condition that the local council issued the necessary building permit. The taxpayer was one of the joint-venturers and the issue was whether the final sum paid in July 1988 was derived in the year in which the contract was executed or in the year in which the contract became unconditional. It was held that the contract for the sale was either conditional or contingent upon the issue of the building permit, and that the taxpayer did not derive income under the contract until it became unconditional.

In addition, although income is often derived before it is received, it sometimes occurs that an amount does not become income derived until after its receipt. For example, in Jay's The Jewellers Pty Ltd v IR Commrs (1947) 29 TC 274, it was held that amounts received do not represent income derived by the recipient until the recipient's title to it becomes absolute.

In this case, the source of the taxpayer's entitlement and details of the consideration for the transfer of the shares to the Borrower is found in the SLA between the taxpayer and the Borrower. Proceeds to be received under the SLA are composed of the taxpayer's entitled to receive delivery of Equivalent Securities.

Based on the facts provided, the taxpayer obtained absolute entitlement to a right to receive delivery of Equivalent Securities under the SLA. The consideration received under the SLA for the transfer of shares by the taxpayer to the Borrower was the right to receive delivery of Equivalent Securities under the SLA.

Consideration other than in cash

The taxpayer indicate that the inability to establish a value of the proceeds of the disposal of the shares or to convert the right obtained under the SLA to a pecuniary sum should preclude the taxpayer from including an amount as assessable income for the year ended 30 June 2007.

Section 21 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that:

Where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.

Section 21 of the ITAA 1936 has effect subject to section 21A of the ITAA 1936 which applies specifically to non-cash business benefits).

Section 21 of the ITAA 1936 applies where any consideration on a transaction is given or paid other than in cash. It deems the money value of that consideration to have been paid or given.

Section 21A of the ITAA 1936 states:

21A(1) [Non-cash business benefit not convertible to cash] For the purposes of this Act, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash

21A(2) [Where benefit is income derived by taxpayer] For the purposes of this Act, if a non-cash business benefits (whether or not convertible to cash is income derived by the taxpayer:

· the benefit shall be brought into account at its arm's length value, less any contribution made by the recipient. In determining the arm's length value reduced by the recipient's contribution (if any);

· if the benefit is not convertible to case - in determining the arm's length value of the benefit, any conditions that would prevent or restrict the conversion of the benefit to cash shall be disregarded. .

As referenced in Taxation Determination TD 93/234 Income tax: is the value of the shares received as consideration for providing services for research and development activities assessable income in the hands of an independent contractor?, in Case D1 (1953) 4 TBRD it was determined that the market value of the property and not its nominal value was the correct amount to be assessed to the taxpayer for services rendered to a company.

If a taxpayer has traded an asset without receiving a cash amount, but has received some other property the money value of that property is deemed to have been paid or given to the taxpayer under section 21 of the ITAA 1936.

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business provides that, as a general rule, the Tax Office will accept a fair market value of the non-cash benefit as the 'money value' (see paragraph 126 of TR 2006/3). The ruling goes on to state, at paragraph 127:

If a non-cash bounty or subsidy is ordinary income derived by a business taxpayer, the amount assessable under section 6-5 is the arm's length value of the benefit. Subsection 21A(2) of the ITAA 1936 requires that non-cash business benefits that are income of a business taxpayer be included in assessable income at arm's length value, less any contribution made by the recipient. In determining the arm's length value of a business benefit that is not convertible to cash, any conditions that would prevent or restrict the conversion of the benefit to cash are disregarded. ATO ID 2002/632-Subsection 6-5(1) of the ITAA 1997 provides that an amount is assessable income if it is income according to ordinary concepts.

Section 21 of the ITAA 1936 states that where any consideration is paid or given other than in cash, the money value of that consideration shall be deemed to have been paid or given.

In this case the taxpayer had an entitlement at the time of the transfer of shares under the SLA to delivery of property in the form of shares. The right is a contractual promise that has been obtained for value and is capable of being assigned. It is a right of a proprietary nature. The taxpayer received or became entitled to receive that right at the time of the disposal of the shares. Accordingly, the taxpayer has received consideration other than cash, at the time of the disposal of the shares.

Therefore, the taxpayer in effect received consideration when the disposal of the shares occurred, comprising property in the form of the contractual promise for delivery of the Equivalent Securities. As stated above, the right to receive delivery of Equivalent Securities is treated as consideration other than cash.

Under section 21 of the ITAA 1936 and subject to section 21A of the ITAA 1936 the amount to be included in assessable income is the arm's length value the right at the time of the transfer of the share under the SLA, that is, at the time of the disposal of the shares to the Borrower.

Conclusion

The proceeds for the transfer of the shares are assessable income under section 6-5 of the ITAA 1997. The right to receive delivery of Equivalent Securities is treated as consideration other than cash. The amount to be included in assessable income is the arm's length value the right at the time of the transfer of the share under the SLA.

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