Deductibility of premium paid to acquire government bonds (traditional securities)

Is the premium paid by a taxpayer to acquire Commonwealth Government Bonds (CGB) an allowable deduction under subsection 70B(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The taxpayer is entitled to a deduction for the premium paid for the CGB under subsection 70B(2) of the ITAA 1936 in the year in which the security is redeemed.

The taxpayer purchased and held CGB for the purpose of investment and derived interest income on a periodic basis. Each CGB has a face value of $100. The taxpayer paid a premium to purchase the CGB. In other words the taxpayer paid more than the face value to acquire the CGB.

The CGB: • was purchased after the 10 May 1989; • was not issued at a discount at issue date; • does not have deferred interest; • is not capital indexed; and • the taxpayer is not entitled to a payment (other than the periodic interest payment) exceeding the issue price at maturity.

At maturity, the taxpayer will receive the face value of the CGB.

Subsection 70B(2) of the ITAA 1936 states that where a taxpayer disposes of a traditional security or a traditional security 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.

A traditional security is defined in section 26BB of ITAA 1936 as a security held by a taxpayer that: • is or was acquired after 10 May 1989; • either: does not have an 'eligible return' or; has an 'eligible return'; and the precise amount of the 'eligible return' can be calculated at the time the security was issued; and that amount is not greater than 1.5% of the sum of the payments (excluding periodic interest) liable to be made under the security when held by any person multiplied by the term of the security in years (including fractions of years); • is not a 'prescribed security'; and • is not trading stock of the taxpayer.

'Eligible return' is defined in subsection 159GP(3) of the ITAA 1936 to mean that there will be an eligible return on a security where, at the time the security was issued, it is reasonably likely that because: • the security was issued at a discount; or • bears deferred interest; or • is capital indexed; or • for any other reason, having regard to the terms of the security,

the sum of all payments (other than periodic interest payments) under the security will exceed the issue price of the security. The amount of the excess is the 'eligible return'.

A 'prescribed security' is defined in section 26C of the ITAA 1936 to mean: • a seasonal security as defined in section 4 of the Loan (Short-term Borrowings) Act 1959 ; or • any Commonwealth Government Inscribed Stock or Australian Consolidated Inscribed Stock or other security issued by the Commonwealth that does not bear interest, and includes an interest in any such seasonal security, stock or other security.

The CGB purchased by the taxpayer are traditional securities because they: • were purchased after 10 May 1989; • did not have an 'eligible return'; • are not 'prescribed securities'; and • are not trading stock of the taxpayer.

Accordingly, the taxpayer is entitled to a deduction under section 70B of the ITAA 1936 for the premium in the year of income that the CGB are redeemed.

Date of Amendment Part Comment 2 September 2014 Facts Minor adjustment to text to emphasise CGB is not held as trading stock Reasons for Decision Minor amendments to correctly reflect legislation.

Date of Amendment | Part | Comment

2 September 2014 | Facts | Minor adjustment to text to emphasise CGB is not held as trading stock

Reasons for Decision | Minor amendments to correctly reflect legislation.