Commentary on Sections Overview Chapter 3: Exemptions relating to interest on securities Section 681: Unrealised interest received by transferee after transfer
2015.This section provides an exemption for unrealised interest on securities if the securities have been transferred with unrealised interest. It is based on sections 716(4) and (5) and 719(3) of ICTA.
2016.As explained in the commentary on section 634, if securities are transferred with unrealised interest (and the settlement day falls before the end of the last interest period) a payment is treated as made to the transferor but no one is treated as making the payment. The unrealised interest is acquired by the transferee from the transferor and the effect of treating this payment as made to the transferor is to charge the transferor to income tax on the interest (which accrued while in the transferor’s ownership).
2017.It follows that when the unrealised interest is subsequently received by the transferee it should not be taxed in the transferee’s hands or the interest would be taxed twice. This section prevents double taxation by exempting the interest from income tax.
2018.Subsection (2) indicates that the transferee is exempt from income tax on the receipt of the unrealised interest unless subsections (3) and (4) apply.
2019.Subsection (3) applies if the issuer of the securities has defaulted on the obligation to pay interest. In such a case, the payment treated as made to the transferor under section 634 is changed to reflect the value of the right to receive interest (instead of the amount of the interest). The amount of the interest which is exempt from tax in the hands of the transferee is correspondingly restricted. See the commentary on sections 660 and 661.
2020.The result is that the interest is taxed, but only (see subsection (6)) to the extent that it exceeds the value on the day of the transfer of the right to receive the interest (see subsection (4)).
2021.See paragraph 128 of Schedule 2 which restricts the application of the section if the transfer mentioned in subsection (1) occurred before 19 March 1986.