Income Tax Act 2007 section 632

Payment on transfer with accrued interest

Section 632 sets out how the accrued interest payment is determined when securities are transferred with accrued interest, and in which interest period that payment is treated as being made.

• When securities are transferred with accrued interest, a payment is treated as made by the buyer to the seller in the interest period containing the settlement day, creating a taxable accrued income profit for the seller and equivalent relief for the buyer.
• If the buyer separately accounts to the seller for the gross accrued interest (as is common in financial market transactions), the deemed payment equals that separately accounted interest amount.
• If there is no separate accounting, the deemed payment is either the full interest payable on that day (if the settlement day happens to be an interest payment day) or, in all other cases, a time-apportioned amount calculated as I × A / B, where I is the interest due on the next interest payment day, A is the number of days from when that interest starts accruing to the settlement day, and B is the number of days from when that interest starts accruing to the next interest payment day.
• Special rules apply where there is no identifiable transferor or transferee (for example, in the case of gilt strips or newly issued securities with extra return), and the section is also subject to overriding provisions for new securities with extra return and for interest in default.