ATO Interpretative Decision
ATO ID 2003/982
Income Tax
Are UK treasury bonds 'traditional securities'?FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Do United Kingdom (UK) treasury bonds satisfy the definition of a 'traditional security' under subsection 26BB(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for Australian tax law purposes?
Decision
Yes. The UK treasury bonds in question do satisfy the definition of 'traditional securities' under subsection 26BB(1) of the ITAA 1936 for Australian tax law purposes.
Facts
1. The taxpayer became the residual beneficiary in the will of their late relative.
2. Part of estate is in English Treasury Bonds.
3. The bonds were purchased by the relative after the 10 May 1989.
4. The bonds generate income paid twice a year in Sterling.
6. No withholding tax is deducted when interest is paid to Australia.
Reasons for Decision
Subsection 26BB(1) of the ITAA 1936 defines the term 'Traditional Security'. A traditional security is a security that was acquired by the taxpayer after 10 May 1989. The traditional security must not have an eligible return. However, if it does have an eligible return it may still be a traditional security if two further conditions are satisfied. Firstly, the precise amount of the eligible return is ascertainable at the time of issue and secondly that it is not issued at a discount of greater then 1.5% multiplied by the number of years, including fractions of a year, of the term of the security. Traditional securities do not bear deferred interest nor are they capital indexed. If securities amount to trading stock of the taxpayer they will not be characterised as traditional securities.
The term 'security' is defined in subsection 159GP(1) of the ITAA 1936;
Security
means:
An eligible return as discussed above has the meaning given by subsection 159GP(3) of the ITAA 1936. This provision tells us that a return will be an eligible return if at the time of issue it is reasonably likely that the sum of all payments received in relation to the security, (excluding periodic interest payments), will exceed the issue price. The difference between these two amounts will be the eligible return. The provision cites three main reasons why an eligible return may arise being;
- •
- That the security was issued at a discount,
- •
- That the security is capital indexed, or
- •
- That the security gives rise to deferred interest.
All of the taxpayer's UK bonds give rise to a redemption price that is lower than the issue price. None of the prospectuses contain deferred interest clauses, nor are they capital indexed and they were not issued at a discount. At no time has the taxpayer been carrying on a business of trading UK treasury bonds. Therefore the bonds in question can not be characterised as trading stock.
The UK Treasury bonds in question clearly satisfy the meaning of the term 'security' as set out in subsection 159GP(1) of the ITAA 1936. The UK Treasury bonds also satisfy the further conditions set out in subsection 26BB(1) of the ITAA 1936 defining 'traditional securities'.
Therefore, bonds of this nature are traditional securities for the purposes of the tax law under subsection 26BB(1) of the ITAA 1936.
Date of decision: 24 September 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
subsection 26BB(1)
subsection 159GP(1)
subsection 159GP(3)
Related Public Rulings (including Determinations)
Taxation Ruling TR 96/14
Keywords
Traditional securities
ISSN: 1445-2782