A bond is essentially a loan made by your SMSF to a bond issuer. In return, the issuer agrees to:
- Pay regular interest (coupons) during the term of the bond
- Repay the face value (principal) at the bond’s maturity date
Compliance & Tax Considerations
SMSF Trustees must ensure that bond investments align with the Fund’s written investment strategy, are made on an arm’s length basis, and are reported at market value. Interest income received from bonds is assessable income for the SMSF. Profits or losses arising from the disposal or redemption of bonds are generally treated as ordinary income or deductions, not capital gains or losses, in accordance with ATO guidelines for traditional securities. You are not entitled to claim a deduction for a loss you made on the disposal or redemption of a bond that is a traditional security to the extent that the loss is a capital loss or is of a capital nature.
Trading Bonds
- Sale Price May Differ from Face Value:
- Market value depends on interest rates, credit risk, maturity, and demand
- Bonds trade on the secondary market
- Capital Gain or Loss:
- Gain or loss treated as ordinary income or deduction for SMSF purposes
- Interest Already Earned:
- SMSF may receive accrued interest, or it may be factored into sale price