Originally Posted by
Aaron
Another thought at what point are you in the business of buying and selling bonds?
Most of the yield buying on the secondary market is purchasing the bonds for less than $1. When matured the full $1 is paid out and the difference is treated as income using the base price adjustment which deems the extra money received "interest".
The IRD say that when this deemed "interest" is a loss it is not deductible as it does not relate to the income earning process. Sounds like a lot of bollocks to me but interested to know others views.
To satisfy the general permission there must be a sufficient relationship between the repayment of the interest and the earning of assessable income. The Commissioner considers the relationship between the repayment and the interest income earned under the term deposit is insufficient to satisfy s DA 1(1)(a). As the amount of the repaid interest is not deductible at the time of repayment, it falls to be dealt with through the BPA on maturity of the deposit. However, the Commissioner considers that, where the expenditure has been incurred in carrying on a business, a deduction may be available under s DA 1(1)(b). Whether the repayment of interest satisfies the nexus test for a business will depend on the facts of each case.
I recall going over this back in the GFC when the finance companies were collapsing.