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Payments on transfer with accrued interest

The majority of transfers are made with accrued interest (鈥榗um div鈥�), that is, on the basis that the transferee will receive the next payment of interest. These are taxable in accordance with the rules in ITA07/S632. The transferee is treated as making a payment to the transferor in the interest period in which the settlement day falls. The payment is the amount of the gross interest accruing to the settlement day, which in most cases is shown separately from the consideration for the securities, under the arrangement (that is, the contract note) by which the transferee accounts to the transferor. This is commonly known as the 鈥榗lean price鈥� basis.

In exceptional cases - for example, sales off market, gifts, settlements, and deemed transfers - there will be no contract note and it will it be necessary to compute the amount of the payment. Where this is done, the formula

I x A/B

is used.

I is the interest payable on the securities on the first interest day after the settlement day (鈥榯he payment day鈥�).

A is the number of days in the period up to and including the settlement day.

B is the number of days in the period ending with the payment day.

Example

Harriet sells corporate bonds to Howard on 15 March 2015. Interest is paid on the bonds on 31 March, 30 June, 30 September and 31 December. Howard will receive the interest coupon due on 31 March 2015, that is, the sale is cum div. The interest Howard receives is 拢200.

If Harriet agrees to sell the bond to Howard for a 鈥榗lean price鈥� of 拢10,000 plus an additional 拢165 for accrued interest, she is taxable on accrued income profits of 拢165 in 2014-15. Howard will reduce his accrued income profits by 拢165.

Suppose that, instead, Harriet simply agrees to sell the bond to Howard for 拢10,165. The relevant interest period is 1 January to 31 March 2015, so B is 90 days. The number of days up to and including 15 March (A) is 74. So the 鈥榓ccrued amount鈥� is 拢200 x 74/90 = 拢164.44. Again, Harriet鈥檚 taxable accrued income will be 拢164, and Howard鈥檚 reduced by 拢165 (following the principle of rounding in the taxpayer鈥檚 favour).

See SAIM4160 for more examples.