Draft Taxation Determination

TD 92/D228

Income tax: is a premium received on the issue of bonds assessable income?

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FOI status:

draft only - for comment

Preamble

1. A premium (being the amount received in excess of the face value of a bond on issue) is assessable under subsection 25(1) of the Income Tax Assessment Act 1936 if:

(i)

a taxpayer raises funds through the issue of bonds;

(ii)

a premium is received by the issuer;

(iii)

the premium is non-refundable; and

(iv)

the issuer's right to the premium is not dependent upon any subsequent event.

2. In the case of banks, finance companies and finance subsidiaries of corporate groups, the receipt of the premium is assessable income derived in the ordinary course of the business of borrowing and lending money (see Avco Financial Services v. FC of T 82 ATC 4246; (1982) 13 ATR 63 and Mutual Acceptance Limited v. FC of T 84 ATC 4831; (1984) 15 ATR 1238).

3. If a taxpayer's ordinary course of business is other than the borrowing and lending of money, the receipt of the premium is still assessable income. In this situation the premium represents an isolated gain from a commercial transaction that has the necessary profit making purpose to categorise it as assessable income (see FC of T v. The Myer Emporium Ltd 87 ATC 4363; (1987) 18 ATR 693; FC of T v. Cooling 90 ATC 4472; (1990) 21 ATR 13 and Westfield Ltd v. FC of T 91 ATC 4234; (1991) 21 ATR 1398). A detailed discussion of gains from isolated transactions can be found in Taxation Ruling TR 92/3.

4. This principle may also apply to premiums on the issue of other forms of debt securities.

Example:

Australian Holding Company (AHC) issues Eurobonds at an issue price of 101.5%. The face value of the issue is $A50,000,000 with a coupon rate (interest) of 9.5%. AHC receives $A50,000,000 principal plus a non-refundable premium of $A750,000 (ie. $A50,000,000 @ 1.5%). The premium is assessable under subsection 25(1) of the ITAA on receipt by AHC.

Commissioner of Taxation
10/12/92

This Draft Determination has been withdrawn by TD 92/D228W.

References

ATO references:
NO SYD/DTD/92/6

Related Rulings/Determinations:

TR 92/3

Subject References:
assessable income
issue of bonds
premium

Legislative References:
ITAA 25(1)

Case References:
Avco Financial Services v .FC of T
82 ATC 4246
(1982) 13 ATR 63

Mutual Acceptance Limited v . FC of T
84 ATC 4831
(1984) 15 ATR 1238
FC of T v. The Myer Emporium Limited
87 ATC 4363
(1987) 18 ATR 693
FC of T v. Cooling
90 ATC 4472
(1990) 21 ATR 13
Westfield Limited v. FC of T
91 ATC 4234
(1991) 21 ATR 1398