A Bond is a type of loan made by an investor to a borrower, typically a government or corporation. When you buy a bond, the SMSF is lending money to the issuer in exchange for:
- Coupons: Regular interest payments
- Repayment of the original amount (face value or principal) at a set maturity date.
An SMSF is allowed to invest in bonds as long as the investment strategy allows for it.
Trading Bonds
Once a bond is issued, it can be sold and traded in the exchange market or over-the-counter. Depending on the interest rate or coupon rate associated with the bond, the price of the bond can fluctuate. The price of a bond can be affected by several factors such as interest rates, credit rating of the issuer, time to maturity, and inflation expectations.
Tax Implications
Generally, a loss or profit for a bond is incurred when the bond is redeemed or sold to someone else before it has been repaid. The profit should be included on the tax return as Other income. If a loss is incurred on realization the loss can be claimed as deduction on your tax return as Other deductions. It is not usually treated as a capital gain or loss because bonds are typically held to generate income, making them revenue assets. Under Australian tax law, many bonds are specifically excluded from CGT treatment, so any profit or loss is generally assessable as ordinary income or deductible as an expense.
However, if the disposal or redemption of the bond is capital in nature it cannot be claimed as a tax deduction. If this is the case, the capital loss can only be applied against capital gains. To see a more detailed guidance on Bonds from the ATO’s perspective, please click here.