Income Tax Act 2007 section 681

Unrealised interest received by transferee after transfer

Section 681 prevents double taxation when a buyer of securities receives interest that had already accrued before the transfer took place, by providing an exemption from income tax on that unrealised interest.

• When securities are transferred with accrued but unpaid interest, the transferor is treated as having received a payment and is taxed on that interest; if the transferee were also taxed when the interest is actually paid, the same interest would be taxed twice
• To prevent this double charge, the transferee is generally exempt from income tax on any unrealised interest received after the transfer
• The exemption is restricted where the issuer has defaulted on its interest obligations: the transferee is only exempt up to the residual value of the right to receive the interest at the date of transfer, less any amounts of that interest previously received
• Any unrealised interest the transferee receives in excess of that residual value remains chargeable to income tax, and foreign currency conversions follow the rules in section 665