ATO ID 2002/833: Interest on Rental Bonds - agents as trustee
Date of decision: 6 August 2002
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Is interest earned on term deposits established by the taxpayer for the purposes of section 42 of the Leases (Commercial and Retail) Act 2001 (ACT), assessable under section 99A of the Income Tax Assessment Act 1936 ('ITAA 1936')?

Decision
No. Interest earned on term deposits established by the taxpayer for the purposes of section 42 of the Leases (Commercial and Retail) Act is not assessable under section 99A of the ITAA 1936 but is assessable to the tenants?

Facts
The taxpayer acts for landlords in leasing out commercial properties in the Australian Capital Territory (ACT). In this role they receive rental bonds on behalf of their clients. The taxpayer places the rental bonds received into an interest bearing account. The term deposit is in the taxpayer's own name on behalf of the tenant. Interest is earned on the term deposit.

Reasons for decision
Summary: The Leases (Commercial and Retail) Act covers the rights and responsibilities of landlords and tenants in the ACT. Section 42 of the Leases (Commercial and Retail) Act states: 'If a lessor requires the tenant to pay a bond - a. the bond must be held by the lessor in trust for the tenant in an account that attracts interest; and b. the lessor must account to the tenant for interest earned on the bond, but the lessor is entitled to keep the interest and deal with it as an amount paid by the tenant to the lessor as part of the bond; and c. the lessor may only use the bond money in accordance with section 43.' Section 43 of the Leases (Commercial and Retail) Act refers to situations where rent has been unpaid or where repairs are necessary due to the acts of the tenant. The taxpayer acts as agent of the lessor with regard to the receipt of the bond. The effect of these provisions is that a trust exists, in relation to the bond, with the taxpayer being the trustee and the tenant the beneficiary. Division 6 of the ITAA 1936 determines the assessability of income earned by a trust. If the tenant is presently entitled to the income then section 97 of the ITAA 1936 will apply to assess the income to them. Alternatively, if no one is presently entitled, the taxpayer as trustee will be assessable under section 99A of the ITAA 1936. Present entitlement requires a vested and indefeasible interest in the income. Under section 42 of the Leases (Commercial and Retail) Act, the interest earned under the term deposit accrues to the tenant. The owner, or any agent on their behalf, cannot appropriate the interest unless they are owed money by the tenant for rent or repairs under section 43 of the Leases (Commercial and Retail) Act. The tenant therefore has a vested and indefeasible interest in the income and is presently entitled to that interest income. As such, the interest earned will be assessable to the tenant under section 97 of the ITAA 1936. Accordingly, the interest will not be assessable to the taxpayer under section 99A of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 97 section 99A
Subject references: Present entitlement Rental Property Trusts