Commonwealth Numbered Acts

TAXATION LAWS AMENDMENT ACT (No. 2) 1994No. 82, 1994 - SECT 10

10. Section 159GQ of the Principal Act is repealed and the following sections
are substituted: Tax treatment of holder of qualifying security Accrual
amounts to be worked out

"159GQ.(1) If a taxpayer holds a qualifying security for all or part of a year
of income, the effect on the taxpayer's taxable income is determined by
working out the accrual amount (see section 159GQB) for each accrual period
(see section 159GQA) in the year of income and then summing the accrual
amounts. Positive sum assessable

"(2) If the sum is a positive amount, the amount is included in the assessable
income of the taxpayer of the year of income. Negative sum deductible

"(3) If the sum is a negative amount, a deduction of the amount is allowable
in the assessment of the taxpayer of the year of income. Accrual period
Taxpayer's maximum term to be divided into accrual periods

"159GQA.(1) The taxpayer's maximum term for the qualifying security is divided
into accrual periods in accordance with this section. Whole year of income

"(2) If a year of income is wholly taken up by any of the taxpayer's maximum
term, the year of income is divided into 2 accrual periods of 6 months.
Beginning of taxpayer's maximum term

"(3) If the taxpayer's maximum term begins after the beginning of the year of
income:

   (a)  if it begins less than 6 months after the beginning of the year of
        income-the period from the beginning of the taxpayer's maximum term
        until the middle of the year of income is an accrual period and the
        second 6 months of the year of income is an accrual period; and

   (b)  in any other case-the part of the year of income taken up by the
        taxpayer's maximum term is an accrual period. End of taxpayer's
        maximum term

"(4) If the taxpayer's maximum term ends before the end of a year of income:

   (a)  if it ends no later than 6 months after the beginning of the year of
        income-the part of the year of income taken up by the taxpayer's
        maximum term is an accrual period; and

   (b)  in any other case-the first 6 months of the year of income is an
        accrual period and the period from the middle of the year of income
        until the end of the taxpayer's maximum term is an accrual period.
        Example

"(5) For example, if the taxpayer's year of income is a financial year and a
security with a 2 year term is issued to the taxpayer on 1 April, the accrual
periods will be as follows: 1st year of income
2nd year of income
3rd year of income
1 Apr.   1 July

               1 Jan.       1 July

                               1 Jan.    1 Apr.
3 month accrual period
6 month accrual period
6 month accrual period
6 month accrual period
3 month accrual period Accrual amount Formula

"159GQB.(1) The 'accrual amount' for an accrual period is worked out using the
formula: (Implicit interest rate x Opening balance) - Periodic interest etc.

"Implicit interest rate"

"(2) In the formula in subsection (1), 'Implicit interest rate' means the rate
of interest worked out under section 159GQC (for a fixed return security) or
159GQD (for a variable return security), properly adjusted to take account of
the case where the accrual period is less than 6 months.

"Opening balance"

"(3) In the formula in subsection (1), 'Opening balance' means the amount
worked out using the formula:
Issue/transfer price + Previous accruals - Payments where:
'Issue/transfer price' means the issue price or transfer price, as the case
requires, of the security; and
'Previous accruals' means:

   (a)  if paragraph (b) does not apply-the sum, whether positive or negative,
        of all accrual amounts for previous accrual periods in the taxpayer's
        maximum term; or

   (b)  if the accrual period is the first in the taxpayer's maximum term-nil;
        and
'Payments' means all payments (other than of periodic interest) made or liable
to be made under the security during all previous accrual periods in the
taxpayer's maximum term. "Periodic interest etc."

"(4) In the formula in subsection (1), 'Periodic interest etc.' means the sum
of:

   (a)  all periodic interest payments made or liable to be made under the
        security during the accrual period, properly adjusted in the case of
        any payment made other than at the end of the period; and

   (b)  if any payments (other than of periodic interest) made or liable to be
        made under the security during the accrual period are made or liable
        to be made other than at its end-an amount to adjust properly for the
        making of the payments other than at the end of the period. Implicit
        interest rate for fixed return security

"159GQC. For the purposes of the formula component 'Implicit interest rate' in
subsection 159GQB(1), the rate of interest for a fixed return security in
relation to a taxpayer is the rate of compound interest per period of 6 months
at which:

   (a)  the sum of the present values of all amounts payable under the
        security during the taxpayer's maximum term; equals:

   (b)  the issue price or the transfer price, as the case requires, of the
        security. Implicit interest rate for variable return security Implicit
        interest rate to be recalculated each year etc.

"159GQD.(1) For the purposes of the formula component 'Implicit interest rate'
in subsection 159GQB(1), the rate of interest for a variable return security
must be worked out in accordance with subsection (2) separately for each year
of income during the taxpayer's maximum term. If there are 2 accrual periods
of 6 months in the year of income, the rate is the same for both periods. It
is possible for the rate to be negative. Rate

"(2) The rate applicable in relation to a year of income is the rate of
compound interest per period of 6 months in the calculation period (see
subsection (3)) at which:

   (a)  the sum of the present values of all amounts payable under the
        security during the calculation period; equals:

   (b)  the opening balance, mentioned in subsection 159GQB(1), for the
        accrual period that begins the calculation period.

"Calculation period"

"(3) The 'calculation period' means the part of the taxpayer's maximum term
that occurs after the beginning of the year of income. Where amount payable is
not known

"(4) For the purposes of paragraph (2)(a), if by the end of the year of income
it is not possible to determine whether an amount will be payable, or the size
of the amount that will be payable, after the end of the year of income, the
determination is to be made by applying subsection (5), (7) or (11), or a
combination of those subsections. Assumption of constant level

"(5) Subject to subsection (7), if an amount payable is worked out to any
extent by reference to the amount or level, at a particular time, of a rate,
price, index or other thing, it is to be assumed that the rate, price, index
or thing will be the same at all times after the end of the year of income as
it was at the end of the year of income (or, if it was not available at the
end of the year of income, at the time when it was last available in the year
of income). Examples

"(6) For the purposes of subsection (5):

   (a)  an example of an amount worked out wholly by reference to the amount
        of a rate at a particular time is an interest payment under a floating
        rate note. The amount payable is the product of an interest rate
        indicator (such as the prevailing bank bill rate) and the face or par
        value of the note; and

   (b)  an example of an amount worked out wholly by reference to the amount
        of a price at a particular time is a redemption payment under a
        commodity linked security where the amount of the payment is the
        product of the prevailing price of a commodity (such as gold) and the
        face or par value of the security. Assumption of continuing rate of
        change

"(7) If an amount payable is worked out to any extent by reference to the
amount of change in an index or other thing that occurs during a period, it is
to be assumed that the index or other thing will continue to change at the
same rate as it did:

   (a)  if the index or other thing was available at the end of the year of
        income-during the year of income; or

   (b)  in any other case-during the period of 12 months in respect of which
        the index or other thing was last available in the year of income.
        Example

"(8) An example for the purposes of subsection (7) is a payment whose amount
is the product of the face or par value of a security and the percentage
increase in the All Groups Consumer Price Index number (the 'CPI') during the
year ending on 30 June 1995. If the year of income for which the implicit
interest rate is being worked out is the 1993-94 year of income and the CPI
increases by 2% during the year ending on 31 March 1994 (the date of the last
available number during the year of income), the CPI is assumed to increase by
2% during the year ending on 30 June 1995. Disguised continuing rate of change
case

"(9) For the purposes of subsection (7), if an amount payable is worked out to
any extent by reference to the quotient of:

   (a)  the amount or level of an index or other thing at a particular time;
        and

   (b)  either:

        (i)    the amount or level of the index or other thing at a different
               time; or

        (ii)   another amount that, while not expressed to be the amount or
               level of the index or other thing at a different time, may
               reasonably be regarded as representing the amount or level of
               the index or other thing at a different time; the amount
               payable is taken to be worked out to that extent by reference
               to the amount of change in the index or other thing that occurs
               during the period between the 2 times. Example

"(10) An example for the purposes of subsection (9) is a payment under a
security issued in December 1994 that is worked out by multiplying a number of
dollars by the quotient of:

   (a)  the All Groups Consumer Price Index number in respect of the quarter
        ending on 31 December 1997; and

   (b)  the number 114. Assume that the number in paragraph (b) is the same as
        the All Groups Consumer Price Index number in respect of the quarter
        ending on 31 December 1994. In this case, it would be reasonable to
        regard the number as representing the amount of the index at 31
        December 1994, and therefore to apply subsection (7). General
        assumption

"(11) If it is not possible to make the determination mentioned in subsection
(4) in respect of the whole or part of any amount by applying subsection (5)
or (7), or both, (for example, because no information about a rate, price or
index was available during the year of income), the determination in respect
of that whole or part is to be made on the basis of what is most likely in the
circumstances.".