Where a non-financial institution (non-FI) derives interest from a negotiable certificate of deposit (NCD) or derives gains or profits from the sale thereof, the amount of taxable income derived must be computed based on the rules prescribed under Section 10(12) of the Income Tax Act 1947. This is notwithstanding the adoption of FRS 109 tax treatment by the non-FI.
The paragraphs below summarise the tax treatment of interest, gains or profits derived from NCDs by a non-FI.
Deemed passive interest income
All interest, gains or profits derived from NCDs by a non-FI are deemed as passive interest income taxable under Section 10(1)(d).
Original holders of NCDs
An original holder of an NCD must report any interest, gains or profit as interest income in its tax returns. Any loss incurred on the sale of NCDs cannot be deducted against other sources of income.
Subsequent holders of NCDs
For a subsequent holder, its deemed interest income from NCDs is determined as follows:
- If a subsequent holder purchases an NCD at a price higher than the issued price and subsequently receives interest on that NCD, the income from such interest is to be reduced by the amount by which the purchase price exceeds the issued price of the NCD (say X). No reduction is required if X has already been excluded in the computation of any previous interest derived by the subsequent holder in respect of that NCD.
- Where a subsequent holder sells an NCD after receiving interest from it, the gains or profit is deemed to be the amount by which the sale price exceeds the lower of the issued price and the purchase price.
- If a subsequent holder purchases an NCD at a price lower than the issued price and holds the NCD till maturity, the amount by which the issued price exceeds the purchase price is deemed to be interest derived by the subsequent holder.
Example: Computation of Income for Subsequent Holders
Issued price (face value) of NCD: $1,000,000
Date of issue: 1 Jan 2018
Date of maturity: 1 Jan 2021
Interest rate: 8% per annum payable on 1 Jan of each year
B purchases the NCD from A, the original holder, on 1 May 2018 for $1,020,000. B receives interest of $80,000 on 1 Jan 2019 and 1 Jan 2020 respectively and sells the NCD to C on 1 Apr 2020 for $1,025,000.
C sells the NCD to D on 1 Aug 2020 for $1,040,000.
D holds the NCD until maturity.
B, C, and D are non-FIs, with Dec year-ends. Their income for each relevant year of assessment (YA) is computed as follows:
| B's Income | YA 2020 | YA 2021 |
|---|---|---|
| Interest received on NCD | 80,000 | 80,000 |
| Less: Amount by which purchase price ($1,020,000) exceeds issued price ($1,000,000), except where the amount has been excluded in the computation of any previous interest | (20,000) | 0 |
| 60,000 | 80,000 | |
Gains/ profit from sale of NCD
| 0 | 25,000 |
| Deemed interest income tax under Section 10(1)(d) | 60,000 | 105,000 |
| C's Income | YA 2021 |
|---|---|
| Interest received on NCD | 0 |
Gains/ profit from sale of NCD
| 15,000 |
| Deemed interest income tax under Section 10(1)(d) | 15,000 |
| D's Income | YA 2022 |
|---|---|
| Interest received on NCD | 80,000 |
Less: Amount by which purchase price ($1,040,000) exceeds issued price ($1,000,000), except where the amount has been excluded in the computation of any previous interest | (40,000) |
| Deemed interest income tax under Section 10(1)(d) | 40,000 |