Private ruling: Deductibility of premium paid to acquire corporate bonds
Published: August 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you able to amortise the premium paid by you to acquire corporate bonds as an allowable deduction over the period from acquisition to maturity? | A1: No | Q2: Will the premium paid by you to acquire corporate bonds be an allowable deduction in the year in which the bonds mature? | A2: Yes

Relevant facts and circumstances: You intend to purchase some corporate bonds and keep them until maturity. The purchase price of the bonds will be more than their face value. The bonds will carry a fixed annual rate of interest on the face value of the bonds, payable quarterly and are redeemable on maturity at their face value. The bonds are not deferred interest or capital indexed bonds. You will not hold the bonds as trading stock.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 26BB | Income Tax Assessment Act 1997 section 26C | Income Tax Assessment Act 1997 subsection 70B(2) | Income Tax Assessment Act 1997 subsection 159GP(3) | Loan (Short-term Borrowings) Act 1959 section 4

Reasons for decision: Summary: Section 70B(2) of the Income Tax Assessment Act 1936 (ITAA 1936) allows a deduction for any loss on the disposal or redemption of traditional securities in 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: a) is or was acquired after 10 May 1989; b) 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); c) is not a 'prescribed security'; and d) 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, if 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, for 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) a seasonal security as defined in section 4 of the Loan (Short-term Borrowings) Act 1959 ; or b) 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 bonds you intend to purchase are traditional securities because they: • will be purchased after 10 May 1989; • will not have an 'eligible return'; • will not be 'prescribed securities' and • will not be trading stock in your hands. In your case, you intend to purchase a parcel or parcels of corporate bonds at a premium of their face value. At redemption, you will only receive the face value of the bonds, therefore incurring a loss. Consequently a deduction for this premium is allowable in the year in which the bond is redeemed.