ATO Interpretative Decision
ATO ID 2007/222
Income Tax
Interest received from 'tax-free stock'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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the interest received from stock described as 'tax-free stock', as recorded in the stock registry operated by the Reserve Bank of Australia (RBA), subject to income tax?
Decision
No. The registry, which is maintained by the RBA and administered by the Australian Office of Financial Management (AOFM),contains 265 holders of 'tax-free stock', the interest from which is not subject to income tax.
Facts
The taxpayer inherited 'tax-free stock'. This stock was originally issued by the States of Victoria and NSW prior to 1 January 1924 on a perpetual basis.
In 1931 this stock was converted into Commonwealth loans under the Debt Conversion Act 1931 (Cth) (Debt Act).
This stock was not subject to Commonwealth income tax prior to the operation of the Debt Act.
Reasons for Decision
Section 3 of the Debt Act provides that 'tax-free securities' are:
- i.
- securities issued by a State before 1 January 1924, and
- ii.
- which have not before the commencement of the Debt Act been subject to Commonwealth income tax.
As the bonds were originally issued by the States of NSW and Victoria and were not subject to Commonwealth income tax, they fall within the definition of 'tax free securities'.
These tax-free securities were converted to 'new securities' by section 3 of the Debt Act. Upon this conversion, section 14 of the Debt Act provided that the securities were not to be subject to income tax for the 'original duration of the security'.
Subsection 14(4) of the Debt Act provided that the new securities would conform to the conditions of the existing tax-free securities in respect of duration.
Since the bonds were issued on a perpetual basis, the new securities continue to be held on the same basis.
Section 5 of the Statute Law Revision Act 1973 repealed the Debt Act in 1973. However, section 9 of that Act provided for the continued operation of the Debt Act to the extent of its prior effect. Therefore, the tax free status of the interest receipts from the stock continued.
Operating simultaneously was section 3 of the Income Tax Assessment Act 1936 (ITAA 1936) which provided that interest receipts from 'tax-free securities' were not subject to the assessment provisions of the ITAA 1936.
Section 3 was repealed in 2006 by item 5 of Schedule 1 to the Repeal of Inoperative Provisions Act 2006. However, this Act also contains a savings provision in item 10 of Schedule 6. This savings provision when read in conjunction with the objects provision, in item 6 of Schedule 10, allows for the continued operation of section 3 of the ITAA 1936 in the context of the tax free bonds on the registry maintained by the RBA and administered by the AOFM. This continued operation means that the interest receipts will still be tax free despite the repeal of section 3 of the ITAA 1936.
Therefore, interest derived from 'tax-free stock' as listed on the registry maintained by the RBA and administered by the AOFM is not assessable income.
Date of decision: 5 December 2007Year of income: Year ended 30 June 2008
Legislative References:
Debt Conversion Act 1931
section 3
section 14
subsection 14(4)
section 5
section 9 Income Tax Assessment Act 1936
section 3 Repeal of Inoperative Provisions Act 2006
item 5 of Schedule 1
Other References:
Reserve Bank of Australia stock registry
Keywords
Interest income
Income tax
Securities
Date reviewed: 24 April 2017
ISSN: 1445-2782