Traditional securities are bonds, debentures, bills of exchange, promissory notes, loans and deposits with banks, building societies and other financial institutions. Shares and units in units trusts are not traditional securities.

Gains on traditional securities issued after 10 May 1989 are taxed as ordinary income (s.26BB of ITAA 1936). Gains are treated as the difference between the payment received on disposal or redemption less the cost of the security. Unlike the taxation of capital gains no indexing or discount is applied.

If the investor makes a loss on disposal of a traditional security, the loss may be treated either as a capital loss subject to CGT rules or as an outright deduction, provided the loss was incurred in the normal course of trading on a securities market.

Why would you want to claim a loss as a capital loss instead of an outright deduction? One obvious example would be if you have little or no income this tax year and would rather keep the capital loss for some future year when it might come in handy.

Losses due to forgiveness of debt are not deductible. Losses on disposal of non-marketable securities are covered under the CGT provisions. This covers losses on deposits with bonds and other financial institutions. Under s.70B these losses are generally treated as deductible when the disposal or redemption takes place. Section 110-55 operates in relation to any s.70B capital loss by reducing the cost base of the relevant security.