ATO ID 2007/222: Interest received from 'tax-free stock'
Date of decision: 5 December 2007
Year of income: Year ended 30 June 2008
Business line: Small Business/Individual Taxpayers

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
Summary: Section 3 of the Debt Act provides that 'tax-free securities' are: 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 Section 5 of the Statute Law Revision Act 1973 repealed the Debt Act in 1973.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 Section 3 was repealed in 2006 by item 5 of Schedule 1 to the Repeal of Inoperative Provisions Act 2006 .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.

Legislative references: Debt Conversion Act 1931 section 3 section 14 subsection 14(4)
Other references: Reserve Bank of Australia stock registry
Subject references: Interest income Income tax Securities