Income securities hit a tax snag

Income securities, which exploded onto the market in 1999, have received a knock back from the tax office which says the securities should not be treated as debt for income tax purposes.

About $6 billion was raised by the likes of AMP, Woolworths and the National Australia Bank, when the income securities were released within a few months of each other in 1999.

The Australian Tax Office yesterday issued two draft rulings on the treatment of income securities.

"The broad effect of the rulings is to not treat income securities as debt for tax purposes," the ATO said in a statement.

Income securities are listed hybrid securities issued by banks and other corporations which pay interest and raise permanent capital in what is claimed to be a tax-effective form.

"That is, they are claimed to be treated as debt for tax purposes, but may be considered to be equity for accounting and regulatory purposes," the ATO said.

The Tax Office said payments made by issuers of income securities were not deductible because they were capital in nature.

"Unlike interest payments on debt, the payments made on income securities represent the cost of securing and retaining permanent capital."

In some cases, the payments may be effectively an application of income derived rather than an expense incurred in deriving that income, it said.