Income tax: how is the amount accrued by the formula in Division 16E of the Income Tax Assessment Act 1936 adjusted to reflect amounts paid during an accrual period?

Division 16E of Part III of the Income Tax Assessment Act 1936 (the Act) was enacted to prevent tax deferral opportunities which were available from certain discounted and deferred interest securities. Under Division 16E, the income and deductions from these securities are spread over the term of the security on a basis which reflects the economic gains and losses which have accrued at any point in time.

Division 16E applies to a class of securities defined as 'qualifying securities'. Qualifying securities are divided into two groups: 'fixed return securities' and 'variable return securities'. Assessable income and allowable deductions under qualifying securities are brought to account on a six monthly compounding accruals basis.

For all qualifying securities issued after 27 January 1994, the assessable or deductible amounts are the accrual amounts calculated under section 159GQB of the Act for each accrual period (six months or a portion of six months) in the term of the security. This calculation includes an adjustment to reflect payments made under the security other than at the end of the relevant accrual period. (A similar adjustment is required for fixed return securities issued before 28 January 1994.)

The Explanatory Memorandum to Taxation Laws Amendment Act (No 2) 1994 contained an example of the calculation of a proper adjustment to reflect payments made other than at the end of an accrual period (Example 4, Chapter 2). The formula in that example is incorrect. The correct formula is: