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Edited version of private ruling
Authorisation Number: 1011759136530
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Ruling
Subject: Deduction-traditional securities
Question 1
Are the coupon payments received by you included in your assessable income?
Answer:
Yes.
Question 2
Can you claim a deduction for the accrued interest that you paid as part of the premium, against the coupon payments?
Answer:
No.
Question 3
Is the total premium paid to acquire the bond an allowable deduction on disposal or redemption?
Answer:
Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commenced on:
1 July 2009
Relevant facts
You purchased a bond from a financial institution.
You paid a premium which included an amount of accrued interest to purchase the bond from the former owner.
You will receive semi annually coupon payments over the term of the bond.
A coupon interest rate is being charge over the term of the bond.
The redemption date of the bond is in a few years time.
The bond was not issued at a discount rate.
The bond does not pay any deferred interest.
The bond capital is not indexed.
You are not entitled to any other payments when the bond is redeemed.
At maturity you will receive the face value of the bond.
You are not in the business of trading in bonds and securities.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 6-5(2)
Income Tax Assessment Act 1997 section 109-15.
Income Tax Assessment Act 1936 section 26BB.
Income Tax Assessment Act 1936 subsection 70B(2).
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. This includes nominal interest on capital invested in the form of a traditional security, or bond.
Taxation Ruling TR 96/14 considers the features of a traditional security.
A traditional security is, broadly, a security that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed. A traditional security may be, for example, a bond, a debenture, a deposit with a financial institution or a secured or unsecured loan.
A gain made on the disposal or redemption of a traditional security is included in assessable income under subsection 26BB(2) of the Income Tax Assessment Act 1936 (ITAA 1936).
Section 70B of the ITAA 1936 provides that a loss on disposal or redemption of a traditional security may be an allowable deduction. This includes the premium paid on purchase of the traditional security, or government bond.
The bond issued by the financial institution is accurately described as a traditional security.
The nominal interest your bond earns is assessable as ordinary income when paid as a coupon payment to you.
A deduction is not allowed for the accrued interest against the coupon payments as the accrued interest is part of the premium paid to purchase the bond from the former owner.
However, the total premium paid at the time of taking out the bond is claimable as a deduction under section 70B of the ITAA 1936 at the time the bond is redeemed or disposed of.
Note: Section 109-15 of the ITAA1997 provides that the provision and redemption of a security is not considered to be the acquisition and disposal of an asset for capital gains tax purposes.