Commentary on Sections Overview Chapter 2: Accrued income profits and losses Section 633: Payment on transfer without accrued interest
1854.This section sets out the payments treated as made when securities are transferred without accrued interest. It is based on section 713 of ICTA.
1855.In this case the transferor retains entitlement to all the interest due at the interest payment date falling after the transfer date although the transferor will not be the holder of the security at that time. This will commonly occur where the security in question has gone “ex-dividend” when the transfer is agreed (that is, interest will be paid on the next interest date to whoever is the registered holder when the books for the security are closed until after the interest payment date). Subsection (1) explains that, where securities are transferred without accrued interest, a payment is treated as made by the transferor to the transferee – the reverse of section 632(1).
1856.The right to the interest is retained by the transferor, who will be taxable on the interest arising at the next interest payment. If there are no other transfers of the same kind of security in the interest period, the effect of treating this payment as made is to charge the transferee to income tax on the interest accruing on a day-by-day basis after the settlement of the transfer, the accrued income profit, and to give the transferor equivalent relief when the transferor is taxed on the interest arising at the next interest payment date, the accrued income loss.
1857.Subsection (1) also provides that the payment is treated as made in the interest period in which the settlement day for the transfer falls.
1858.As in section 632, subsections (2) and (3) deal with transfers where the interest which will accrue from the settlement day to the next interest payment day is separately accounted for. The amount of the payment is the amount of the gross interest accounted for.
1859.If subsection (2) does not apply and the settlement day also happens to be an interest payment day, subsection (4) makes clear that the amount of the payment is nil. That reflects the fact that the interest retained by the transferor accrues wholly in the period to the settlement day (and is taxable on the transferor). The accrued income scheme is only interested in disturbing the normal tax rules, in the case of a transfer without accrued interest, where part of the interest period falls after the settlement day (and an amount representing interest should be attributed to the transferee).
1860.In other cases, subsection (5) provides for the interest due on the next interest payment day to be time apportioned to ascertain the interest which will accrue after the settlement of the transfer.
1861.Subsections (7) and (8) modify the operation of subsection (1) if the transfer in point is one for which there is either no transferor or no transferee.