Edited version of private advice

Authorisation Number: 1051624677677

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.

You own a rental property.

The property has been owned by you and rented for XX years.

The foundations were being disturbed by the roots of a tree.

The walls resting on the foundations are cracking due to this disturbance.

The tree was in situ when you purchased the property.

You removed the tree to prevent any further damage.

The cost of removal was $X,XXX

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 Regulations 1997 (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.

Summary Question 3

You can deduct the cost of maintenance and repair of rental properties where it is not capital in nature.

Detailed reasoning Question 3

You can deduct expenditure you incur for maintenance and to premises used for income producing purposes providing the expenditure is not capital in nature (section 25-10 of the ITAA 1997).

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for maintenance and repairs is deductible under section 25-10 of the ITAA 1997. Generally, works can be fairly described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Expenditure for repairs to property is of a capital nature where the work is considered to be an initial repair, where the extent of the work carried out represents a renewal or reconstruction of the entirety, or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair'.

As you have owned the property for an extended period of time and the need for removal of the tree was not evident at the time of purchase the cost of removal is not considered to be initial repairs.

Accordingly, the costs incurred to remove the tree are considered maintenance and repair and are not capital in nature. You are entitled to claim a deduction for the expenditure incurred under section 25-10 of the ITAA 1997.