Edited version of private advice

Authorisation Number: 1051623419168

Date of advice: 6 January 2020

Ruling

Subject: Treatment of accrued interest and corporate bonds and exchange rates.

Question 1

Can accrued interest be separated from the capital value of a corporate bond?

Answer

No

Question 2

Are the Australian Tax Office (ATO) daily foreign exchange rates appropriate to use for conversion of coupon payments received from USD corporate bonds?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You purchase and sell corporate bonds through an investment firm.

You are private investors

You are not running a business trading in corporate bonds.

You have not converted any corporate bonds into shares.

In some cases, the corporate bonds have accrued interest attached to them.

In such cases, the value of the accrued interest is paid to the vendor by the purchaser.

When coupon payments are received from USD bonds, you declare them in AUD using the daily exchange rates published by the ATO.

In their reporting, the investment firm uses conversion rates published by an international company.

The international company exchange rates are generally lower than the ATO daily rates.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 26BB(2)

Income Tax Assessment Act 1936 subsection 70B(2)

Income Tax Assessment Act 1936 subsection 159GP(1)

Income Tax Assessment Act 1997 subsection 960-50(6)

Income Tax Assessment Regulations1997 Schedule 2 at Part 1.2

Reasons for decision

Summary Question 1

When a security (including a corporate bond) is transferred with interest during a coupon period, the consideration given by a purchaser is an outlay of a single indivisible sum. The capital cost of a security is the total amount paid for it.

Detailed reasoning Question 1

A security has the meaning given by s159GP9(1) Income Tax Assessment Act 1936 (ITAA 1936). A security can be stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security.

Taxation ruling TR 93/28 Income tax: basis of assessment of income derived from securities purchased and sold cum interest considers the treatment of accrued interest. It states that when a security (including a corporate bond) is transferred with interest during a coupon period, the consideration given by a purchaser is an outlay of a single indivisible sum. The capital cost of a security is the total amount paid for it.

Section 26BB(2) ITAA 1936 states "Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place."

Section 70B(2) ITAA 1936 states "Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any loss on the disposal or redemption is allowable as a deduction from the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place."

In your case and using the example you provided in your application for a private ruling. You purchased a security with a face value of $X,XXX and $XX accrued interest and paid the vendor $X,XXX. The cost base of that security is $X,XXX.

When you dispose of the same security and the sale price includes accrued interest, the full value of the security is the amount of consideration you receive from the purchaser.

The difference between what you paid when you bought the security and the consideration you received when you disposed of the same security dictates whether you made a capital gain or loss. Any capital gain is assessable income in the year of disposal. Any capital loss is deductible against assessable income in the year of disposal.

Summary Question 2

The ATO daily rates of exchange are an appropriate exchange rate for you to use when converting USD to AUD.

Detailed reasoning Question 2

Subsection 960-50(6) Income Tax Assessment Act 1997 (ITAA 1997) at item 6 in the table states "(a) if the amount is received at or before the time when it is derived - the amount is to be translated to Australian currency at the exchange rate applicable at the time of receipt; or (b) in any other case - the amount is to be translated to Australian currency at the exchange rate applicable when it is derived."

Schedule 2 to the Income Tax Assessment Regulations1997 (ITAR 1997) at part 1.2 states "A taxpayer may use a daily exchange rate that is appropriate to the taxpayer's business or activities, provided the rate is obtained from an arm's length source."

In your case, the ATO daily rates of exchange are an appropriate exchange rate for you to use when converting USD to AUD. Exchange rates used by an international investment firm are not relevant to you.