What is the deemed payment under section 634 of the Income Tax Act 2007?

When securities carrying unrealised interest are transferred and the settlement day falls within an interest period, the transferor is treated as having received a payment equal to the unrealised interest. This deemed payment charges the transferor to income tax on that amount, even though the interest has not yet been paid or become due.

Does the transferee receive a deduction for the deemed payment under section 634?

No. Under section 634, no person is treated as having made the deemed payment. This means the transferee cannot include it in their accrued income profit or loss calculation. The buyer receives no deduction or adjustment in respect of the deemed amount attributed to the transferor on the transfer of the securities.

Can the transferee claim an exemption when the unrealised interest is later received?

Yes. Section 681 of the Income Tax Act 2007 provides a separate exemption for the transferee. If the transferee subsequently receives the unrealised interest and certain conditions are satisfied, that interest may be exempt from tax. This exemption operates in a manner equivalent to the relief available through accrued income losses under section 679.

What happens if the settlement day falls outside the interest period?

If the settlement day falls outside any interest period, section 634 does not apply. Instead, different rules under section 630 of the Income Tax Act 2007 govern the treatment. Additionally, where interest is in default, the general deemed payment rule is modified by section 660, and further deemed payments may arise under sections 632 or 633.

Income Tax Act 2007 section 634

Payment on transfer with unrealised interest

Section 634 deals with the deemed payment that arises when securities carrying unrealised interest are transferred and the settlement day falls within an interest period.

When securities with unrealised interest are transferred and settlement falls within an interest period, a payment equal to the unrealised interest is treated as made to the transferor in that period, charging them to income tax on that amount.
No one is treated as making the deemed payment, so it does not form part of any accrued income profit or loss calculation for the transferee.
The transferee may nevertheless receive an exemption from tax on the interest once it is realised, under section 681, provided certain conditions are met — this mirrors the exemption available through accrued income losses under section 679.
Where the settlement day falls outside the interest period, separate rules under section 630 apply instead; and securities transferred with unrealised interest may also carry accrued interest, potentially giving rise to additional deemed payments under sections 632 or 633.

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